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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[xx] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR
15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to .
Commission File Number 0-20765
SUNRISE ASSISTED LIVING, INC.
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(Exact name of registrant as specified in its charter)
Delaware 54-1746596
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
9401 Lee Highway, Suite 300
Fairfax, VA 22031
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(Address of principal (Zip Code)
executive offices)
Registrant's telephone number, including area code:
(703) 273-7500
Securities registered pursuant to Section 12(b) of the Act:
(Not applicable)
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.01 per share
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(Title of class)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K.
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The aggregate market value of the voting stock held by non-affiliates
of the registrant, based upon the closing price of the registrant's common
stock as of March 17, 1997 is $145,444,050. */
The number of shares outstanding of each of the registrant's classes
of common stock, as of the latest practicable date is:
Class: Common Stock, par value $.01 per share.
Outstanding at March 17, 1997: 18,641,518 shares.
Documents Incorporated by Reference:
Part II: Portions of the Annual Report to Stockholders for the year ended
December 31, 1996.
Part III: Portions of the definitive proxy statement for the Annual Meeting of
Stockholders to be held on April 28, 1997.
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*/ Solely for the purposes of this calculation, all directors and executive
officers of the registrant and all stockholders beneficially owning more than
5% of the registrant's common stock are considered to be affiliates.
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TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page(s)
<S> <C> <C>
PART I Item 1. Business...................................................................... 3
Item 2. Properties.................................................................... 19
Item 3. Legal Proceedings............................................................. 19
Item 4. Submission of Matters to a Vote of Security Holders........................... 19
PART II Item 5. Market for Registrant's Common Equity and
Related Stockholders Matters.................................................. 19
Item 6. Selected Financial Data....................................................... 20
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations........................................... 20
Item 8. Financial Statements and Supplementary Data................................... 20
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure........................................... 20
PART III Item 10. Directors and Executive Officers.............................................. 20
Item 11. Executive Compensation........................................................ 20
Item 12. Security Ownership of Certain Beneficial Owners
and Management................................................................ 20
Item 13. Certain Relationships and Related Transactions................................ 20
PART IV Item 14. Exhibits, Financial Statement Schedules, and Reports
on Form 8-K................................................................... 21
SIGNATURES ........................................................................................... 22
</TABLE>
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This Form 10-K contains certain forward-looking statements relating to the
Company's development and acquisition program over the next three years that
involve risks and uncertainties. The Company's actual results could differ
materially from those anticipated in these forward-looking statements as a
result of certain factors, including those set forth under the captions "Item
1. Business -- Facility Development," "--Facility Acquisitions" and "--Need
For Additional Financing." Unless the context suggests otherwise, references in
this Form 10-K to the "Company" or "Sunrise" mean Sunrise Assisted Living,
Inc. and its subsidiaries and predecessor entities.
PART I
ITEM 1. BUSINESS.
GENERAL
Sunrise Assisted Living, Inc. (the "Company" or "Sunrise") is a
leading provider of assisted living services to the elderly. The Company
currently operates 37 facilities in 11 states with a capacity of approximately
3,428 residents, including 32 facilities owned by the Company or in which it has
ownership interests and five facilities managed for third parties. The Company
had revenues of $47.3 million, and incurred a net loss of $4.8 million, in
1996. Approximately 99% of the Company's 1996 revenues were derived from
private pay sources.
The Company's three-year growth objective is to develop at least 52 new
Sunrise model assisted living facilities with a capacity of approximately 4,680
residents. As of March 17, 1997, the Company has obtained zoning approval for
28 new facilities with a resident capacity of 2,463, including 22 facilities
currently under construction. The Company has also entered into contracts to
purchase 21 additional sites and to lease two additional sites, and is
negotiating purchase terms for the remaining sites. During 1996, the Company
completed development of four of its model facilities ( Raleigh, N.C.,
Pikesville, MD, Blue Bell, PA, and Columbia, MD). In addition to its
construction and development plans, the Company plans to acquire up to 10
additional facilities over the next three years, including one facility located
in Valencia, California (the "California Property") that was acquired in
February 1997 for $13.75 million in cash. In October 1996, the Company completed
its acquisition of five facilities located in the southeast United States (the
"Southeast Properties") for an aggregate purchase price of $34.0 million in
cash. See "--Facility Development" and "--Facility Acquisitions."
On June 5, 1996, the Company completed its initial public offering and
on October 31, 1996 the Company completed a follow-on public offering. Net
proceeds to the Company from these two offerings totaled approximately $196.1
million. The net proceeds have been used as follows: $16.6 million in partial
payment of the Company's long-term debt; $10.2 million to redeem previously
outstanding shares of redeemable preferred stock; $47.8 million to acquire the
Southeast Properties and the California Property; and the balance to fund
continued development of new Sunrise model facilities, as well as for working
capital and general corporate purposes. To achieve its growth objectives, the
Company will need to obtain substantial additional resources to fund its
development, construction and acquisition activities. See "Item 7. Management's
Discussion and Analysis of Financial Condition and Results of Operation."
The Company was incorporated in Delaware on December 14, 1994 in order
to combine various activities relating to the development, ownership and
operation of the Sunrise assisted living facilities held by predecessor
entities. The predecessor entities consisted of a management company, a
development company, and various entities that held 100% ownership interests in
15 facilities, 50% ownership interests in five facilities and minority
ownership interests in two facilities.
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THE ASSISTED LIVING INDUSTRY
The Company believes that the assisted living industry is emerging as
a preferred alternative to meet the growing demand for a cost-effective setting
in which to care for the elderly who do not require the more intensive medical
attention provided by a skilled nursing facility but cannot live independently
due to physical or cognitive frailties. In general, assisted living represents
a combination of housing and 24-hour a day personal support services designed
to aid elderly residents with activities of daily living ("ADLs"), such as
bathing, eating, personal hygiene, grooming and dressing. Certain assisted
living facilities may also provide assistance to residents with low acuity
medical needs, or may offer higher levels of personal assistance for
incontinent residents or residents with Alzheimer's disease or other forms of
dementia. Annual expenditures in the assisted living industry have been
estimated to be approximately $12 billion, including facilities ranging from
"board and care" to full-service assisted living facilities such as those
operated by the Company. The Company believes that consumer preference and
demographic trends will allow assisted living to remain one of the fastest
growing segments of elder care.
The assisted living industry is highly fragmented and characterized by
numerous small operators. The scope of assisted living services varies
substantially from one operator to another. Many smaller assisted living
providers do not operate in purpose-built facilities, do not have
professionally trained staff, and may provide only limited assistance with
low-level care activities. The Company believes that few assisted living
operators provide a comprehensive range of assisted living services, such as
Alzheimer's care and other services designed to permit residents to "age in
place" within the facility as they develop further physical or cognitive
frailties.
THE SUNRISE OPERATING PHILOSOPHY
The Sunrise approach to assisted living is a unique combination of
operating philosophy and a signature facility design. Since the first Sunrise
facility opened in 1981, the Company's operating philosophy has been to provide
care and services to its residents in a residential environment in a manner
that: "nurtures the spirit, protects privacy, fosters individuality,
personalizes services, enables freedom of choice, encourages independence,
preserves dignity and involves family and friends." The Company believes that
its operating philosophy is one of its strengths. Furthermore, in implementing
its philosophy, the Company continuously seeks to refine and improve the care
and services it offers. The elements of the operating philosophy focus on: the
involvement of the resident and the resident's family in important care giving
decisions; the Company's proprietary training programs for its management,
Administrators and Care Managers; the Company's quality assurance programs; the
full range of assisted living services offered by the Company; and the
architecture and purpose-built design of Sunrise's "Victorian" model
facilities.
SERVICES
The Company offers a full range of assisted living services based upon
individual resident needs. Upon admission, the Company, the resident and the
resident's family assess the level of care required and jointly develop a
specific care plan. This care plan includes selection of resident
accommodations and determination of the appropriate level of care. The care
plan is periodically reviewed and updated by the Company, the resident and the
resident's family. By offering a full range of services, including Basic Care,
Assisted Living Plus Care ("Plus Care"), Medication Management and Alzheimer's
Care, the Company can accommodate residents with a broad range of service needs
and enable residents to age in place. In addition, upon admission the Company
generally charges each new resident a one-time community fee typically equal to
two months of daily resident fees, which is refundable on a prorated basis if
the resident leaves the facility during the first 90 days. Daily resident fees
are periodically revised based on increased care or modifications to a
resident's care plan.
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The average daily resident fee for owned facilities operated by the
Company for at least 12 months, excluding facilities with temporary vacancies
due to renovations ("Same Facilities") was approximately $83 for 1996, $80 for
1995 and $75 for 1994.
BASIC CARE
The Company's Basic Care program is provided to all residents and
includes: assistance with ADLs, such as eating, bathing, dressing, personal
hygiene, and grooming; three meals per day served in a common dining room
(including two seating times per meal); coordination of special diets; 24-hour
security; emergency call systems in each unit; transportation to physician
offices, stores and community services; assistance with coordination of
physician care, physical therapy and other medical services; health promotion
and related programs; personal laundry services; housekeeping services; and
social and recreational activities.
ASSISTED LIVING PLUS CARE
Through the Company's Plus Care program, residents who require more
frequent or intensive assistance or increased care or supervision are provided
extra care and supervision. The Company charges an additional daily fee based
on additional staff hours of care and services provided. The Plus Care program
allows the Company, through consultation with the resident, the resident's
family and the resident's personal physician, to create an individualized care
and supervision program for residents who might otherwise have to move to a
more medically intensive facility. At December 31, 1996, approximately 49% of
the Company's assisted living residents participated in the Plus Care program.
MEDICATION MANAGEMENT
Many of the Company's residents also require assistance with
medications. To the extent permitted by state law, the Medication Management
program includes the storage of medications, the distribution of medications as
directed by the resident's physician and compliance monitoring. The Company
charges an additional fixed daily fee for this service. At December 31, 1996,
approximately 57% of the Company's assisted living residents participated in
the Medication Management program.
ALZHEIMER'S CARE
The Company believes its Alzheimer's Care called the Sunrise
Reminiscence Program distinguishes it from many other assisted living providers
who do not provide such specialized care. The Sunrise Reminiscence Program
provides the attention, care programs and services needed to help cognitively
impaired residents maintain a higher quality of life. Specially trained staff
provide Basic Care and other specifically designed care and services to
cognitively impaired residents in separate areas of facilities. The Company
charges each cognitively impaired resident a daily fee that includes one hour
of additional staff time per day. Cognitively impaired residents who require
additional care and services pay a higher daily rate based on additional staff
hours of care and services provided. At December 31, 1996, approximately 25% of
the Company's assisted living residents participated in the Sunrise
Reminiscence Program.
THE SUNRISE "VICTORIAN" MODEL FACILITY
The Company's signature Victorian model facility, first designed in
1985, is a freestanding, residential-style facility with a capacity of 70 to
110 residents. The building ranges in size from approximately 40,000 to 60,000
square feet and is built generally on sites ranging from two to five acres.
Approximately 40% of the building is devoted to common areas and amenities,
including reading rooms, family or living rooms and other areas (such as
bistros and ice cream parlors) designed to promote interaction among residents.
The Company has four basic building plan designs, which
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provide it with flexibility in adapting the model to a particular site. The
building is usually two or three stories and of steel frame construction built
to institutional health care standards but strongly residential in appearance.
The interior layout is designed to promote a home-like environment, efficient
delivery of resident care and resident independence.
Resident units are functionally arranged to provide a
"community-within-a-community" atmosphere. The model facility may be configured
with as many as eight different types of resident units, including double
occupancy units, single units and two- and three-room suites. Sitting areas on
each floor serve as a family or living room. The ground level typically
contains a kitchen and common dining area, administrative offices, a laundry
room, a private dining room, library or living room, and bistro or ice cream
parlor. Typically, one floor or one or two wings of a facility contain resident
units and common areas, including separate dining facilities, specifically
designed to serve residents with Alzheimer's disease or other special needs.
The architectural and interior design concepts incorporate the Sunrise
operating philosophy of protecting resident privacy, enabling freedom of
choice, encouraging independence and fostering individuality in a homelike
setting. The Company believes its model facility meets the desire of many
individuals to move to a new residence at least as comfortable as their former
home. The Company believes that its residential environments also accomplish
several other objectives, including: (i) lessening the trauma of change for
elderly residents and their families; (ii) achieving operational efficiencies
through proven designs; (iii) facilitating resident mobility and ease of access
by care givers; and (iv) differentiating the Company from other assisted living
and long-term care operators.
OWNED FACILITIES
The table below sets forth certain information regarding owned
facilities or facilities in which Sunrise has an ownership interest:
<TABLE>
<CAPTION>
YEAR DEVELOPED SUNRISE
OPENED BY OR MODEL RESIDENT OWNERSHIP
FACILITY LOCATION SUNRISE ACQUIRED FACILITY CAPACITY PERCENTAGE(1)
-------- -------- --------- ---------- -------- --------- --------------
<S> <C> <C> <C> <C> <C> <C>
Sunrise of Oakton Oakton, VA 1981 Acquired(2) 51 100.0%
Sunrise of Leesburg Leesburg, VA 1984 Acquired(2) 35 100.0
Sunrise of Warrenton Warrenton, VA 1986 Acquired(2) 37 100.0
Sunrise of Arlington Arlington, VA 1988 Developed X 58 100.0
Sunrise of Bluemont Park Arlington, VA 1990 100.0
Potomac Developed X 59
Shenandoah Developed X 77
James Developed X 59
Sunrise of Mercer Island Seattle, WA 1990 Developed X 59 100.0
Sunrise of Fairfax Fairfax, VA 1990 Developed X 59 100.0(3)
Sunrise of Queen Anne Seattle, WA 1991 Acquired 136 33.3(4)
Sunrise of Frederick Frederick, MD 1992 Developed X 86 100.0
Sunrise of Countryside Sterling, VA 1992 100.0
East Building Developed(5) X 66
West Building Developed(5) X 64
Sunrise of Gunston Lorton, VA 1992 Developed(5) X 67 100.0
Sunrise of Atrium Boca Raton, FL 1992 Acquired 210 100.0
Sunrise of Falls Church Falls Church, VA 1993 Developed X 66 100.0
Sunrise of Village House Gaithersburg, MD 1993 Acquired 155(6) 80.0
Sunrise of Towson Towson, MD 1994 Developed X 66 13.9(7)
Sunrise of Gardner Park Peabody, MA 1994 Developed X 59 50.0(7)(8)
Sunrise of Annapolis Annapolis, MD 1995 Developed X 88 51.0(8)(9)
</TABLE>
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<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
Chanate Lodge Santa Rosa, CA 1996 Acquired 120 100.0
Sunrise of Raleigh Raleigh, NC 1996 Developed X 93 50.0(8)(10)
Sunrise of Pikesville Pikesville, MD 1996 Developed X 103 51.0(8)(9)
Huntcliff Summitt Atlanta, GA 1996 Acquired 254 100.0(11)(12)
Sunrise of Northshore St. Petersburg, FL 1996 Acquired 157 100.0(11)(13)
Sunrise of Augusta Augusta, GA 1996 Acquired 42 100.0(11)
Sunrise of Columbus Columbus, GA 1996 Acquired 26 100.0(11)
Sunrise of Greenville Greenville, SC 1996 Acquired 39 100.0(11)
Sunrise of Blue Bell Philadelphia, PA 1996 Developed X 97 100.0
Sunrise of Columbia Columbia, MD 1996 Developed X 96 100.0
Sunrise of Hunter Mill Oakton, VA 1997 Developed X 96 100.0
Sunrise of Sterling Canyon Valencia, CA 1997 Acquired 130 100.0
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Total 2,810
======
</TABLE>
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(1) Fifteen of the wholly owned facilities (Oakton, Leesburg, Warrenton,
Arlington, Bluemont Park (three facilities), Mercer Island, Fairfax,
Frederick, Countryside (two facilities), Gunston, Atrium and Falls Church)
serve as collateral for a $87.0 million mortgage loan. Ten other owned
facilities are subject to one or more mortgages or deeds of trust that
mature between 1998 and 2033 and bear interest at rates ranging from
6.875% to 9.125% annually as of December 31, 1996. See "Item 7.
Management's Discussion and Analysis of Financial Condition and Results
of Operations -- Liquidity and Capital Resources" and Note 6 of Notes to
Consolidated and Combined Financial Statements. All facilities that are
wholly owned by the Company are consolidated in the Consolidated and
Combined Financial Statements. The Village House, Gardner Park and Raleigh
facilities are held by limited liability companies or limited partnerships
in which the Company holds the ownership interests indicated in the table.
The Company is the general partner or managing member of such entities and
through the partnership or operating agreements and the management
agreements for the facilities the Company controls their ordinary course
business operations. Therefore, the Village House, Gardner Park and
Raleigh facilities are also consolidated in the Consolidated and Combined
Financial Statements. The ordinary course business operations of the Queen
Anne, Towson, Annapolis and Pikesville facilities are not currently
controlled by the Company and, therefore, are accounted for under the
equity method of accounting.
(2) Each of these facilities has been redeveloped in a manner consistent with
the Sunrise model.
(3) Subject to long-term ground lease.
(4) This property is held as a tenancy-in-common. The remaining ownership
interests are owned by unaffiliated third parties. The Company manages
this facility pursuant to a management contract that is subject to annual
renewal at the option of the owners.
(5) These facilities were initially developed by the Company for third parties
and were subsequently acquired by the Company in 1992.
(6) This facility is licensed for 40 assisted living residents. The remainder
of the resident capacity is for independent living residents.
(7) The remaining ownership interests are owned by third parties. Sunrise
manages each of these facilities.
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(8) A current officer and a former employee of the Company each have a 25%
ownership interest in this facility. Sunrise has the right to acquire
these minority ownership interests for fair market value, as determined by
an appraiser mutually agreeable to the parties.
(9) Commencing on June 1, 1998, the third-party owner of the remaining
interests in the limited partnership that owns this facility ("the
Partnership") has the right to require the Company to buy the facility
from the Partnership for 112 1/2% of its "appraised fair market value" as
mutually agreed upon by the parties or, if they cannot agree, as
determined by an appraiser mutually selected by the parties. Commencing
three years after the date that the certificate of occupancy is received
for the facility (November 1998 for Annapolis and April 1999 for
Pikesville) and continuing for two years thereafter, the Company has the
right to give written notice to such third-party owner that it desires to
buy the facility from the Partnership for 112 1/2% of its appraised fair
market value. If the Company has not given such notice during such
two-year period, then the Company will be deemed to have given such
notice. Such third-party owner will then give notice either that it
consents to such a sale of the facility or that it does not consent. If
the third-party does not consent to such sale, the management agreement
for the facility with the Company would be extended for an additional
seven-year period. After the expiration of such seven-year period, the
third-party would have the right to require the Company to purchase, and
the Company would have the right to purchase, the facility from the
Partnership at 115% of appraised fair market value. If any person or
entity acquires ownership of more than 50% of the outstanding voting stock
of the Company (other than the Company, any subsidiary of the Company,
Paul or Teresa Klaassen, the Company's co-founders, or any affiliate,
associate or the estate of either founder), then the put rights held by
the third party owner become immediately exercisable.
(10) On March 17, 1997, the Company provided notice of its exercise of its
option to purchase all of the third-party interests in the limited
liability company that owns this facility. Under the terms of the
purchase option, the purchase will be completed on or before May 1, 1997,
the price will be the greater of (i) $0.8 million, or (ii) the third
party's 50% interest multiplied by the net value of the limited liability
company's business as determined by applying a 12.5% capitalization rate
to the net operating income of the limited liability company, and
subtracting limited liability company liabilities.
(11) The Company intends to use these facilities as collateral for financing.
(12) This facility is licensed for 24 assisted living residents. The remainder
of the resident capacity is for independent living residents. Excludes 12
units owned by the occupants thereof. The occupants can require the
Company to repurchase the units for their original purchase prices
(aggregating approximately $1.9 million) under certain circumstances. The
Company has a right to purchase the units at fair market value upon the
happening of certain events and has a right of first refusal on sales of
the units.
(13) This facility is licensed for 26 skilled nursing residents. The remainder
of the resident capacity is for assisted living residents.
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MANAGED FACILITIES
The Company also manages facilities for third-party owners. The
following table sets forth certain information regarding facilities currently
being managed by the Company or for which the Company has entered into
development contracts which provide that the Company will manage the facility
following completion of construction:
<TABLE>
<CAPTION>
SUNRISE CONTRACT
MODEL RESIDENT INITIAL EXPIRATION
FACILITY LOCATION FACILITY CAPACITY CONTRACT DATE DATE
-------- -------- -------- -------- ------------- ----
<S> <C> <C> <C> <C> <C>
Woodbury Lake Deptford, NJ X 87 March 1993 June 2001(1)
Mill Run(2) Bristol, PA 186 April 1992 April 1997
Lincolnian(3) Fairfax, VA 84 June 1989 June 1997
John Bertram House Salem, MA 32 June 1994 Oct. 1998
Mount Laurel Mount Laurel, NJ X 90 May 1994(4) July 2021
Boston(5) Boston, MA 139 July 1995 Jan. 2002
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Total 618
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</TABLE>
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(1) This contract is subject to two five-year renewals. Pursuant to the
management agreement, the Company has a right of first refusal to purchase
this facility if the owner receives a bona fide offer to purchase the
facility during the term of the management agreement.
(2) The Company owns $5.4 million carrying value of tax exempt mortgage bonds
on this facility. See Note 4 of Notes to Consolidated and Combined
Financial Statements.
(3) The Company does not provide financial or accounting services for this
facility.
(4) This facility is currently under construction. The Company has entered into
a development contract for this facility which provides that the Company
will begin managing Mt. Laurel for a 25-year period following completion of
construction.
(5) This facility opened on November 12, 1996 and is licensed for 139
continuing care retirement community residents.
The Company also manages two skilled nursing facilities, Pembrook and
Prospect Park, located in West Chester and Prospect Park, Pennsylvania. The
Pembrook facility has 240 beds and the Prospect Park facility has 180 beds.
Both of these facilities are owned by a single unaffiliated nonprofit
corporation. The management contracts for these facilities were initially
entered into in May 1994 and expire in April 1999. The owner of these
facilities has the option to terminate the management agreements in May 1997.
The Company does not provide financial or accounting services for these
facilities.
FACILITY DEVELOPMENT
The Company targets sites for development located in major
metropolitan areas and their surrounding suburban communities. In evaluating a
prospective market, the Company considers a number of factors, including
population, income and age demographics, target site visibility, probability of
obtaining zoning approvals, estimated level of market demand and the ability to
maximize management resources in a specific market by clustering its
development and operating activities.
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The Company continues to develop its Victorian model facilities in
major metropolitan markets. During the next three years, the Company plans to
develop at least 52 additional new Victorian model facilities with an aggregate
capacity of approximately 4,680 residents. To date, the Company has obtained
zoning approval for 28 new facilities with a resident capacity of approximately
2,463 residents, including 22 facilities currently under construction, and has
contracts to purchase 21 additional sites and to lease two additional sites,
and is currently negotiating purchase terms for the remaining sites.
Historically, the Company has completed all but one of the facilities for which
it has obtained zoning approval. The Company bases its development upon its
"Victorian" model facility that it has developed and refined since the first
model facility was designed in 1985. Use of a standard model allows the Company
to control development costs, maintain facility consistency and improve
operational efficiency. Use of the Sunrise model also creates "brand" awareness
in the Company's markets.
The primary milestones in the development process are (i) site
selection and contract signing, (ii) zoning and site plan approval and (iii)
completion of construction. Once a market has been identified, site selection
and contract signing typically take approximately one to three months. Zoning
and site plan approval generally take 10 to 12 months and are typically the
most difficult steps in the development process due to the Company's selection
of sites in established communities which usually require site rezoning.
Facility construction normally takes 10 to 12 months. The Company believes its
extensive development experience gives it an advantage relative to certain of
its competitors in obtaining necessary governmental approvals and completing
construction in a timely manner. After a facility receives a certificate of
occupancy, residents usually begin to move in within one month. Since 1993, the
total capitalized cost to develop, construct and open a Sunrise model facility,
including land acquisition and construction costs, has ranged from
approximately $5.5 million to $10.0 million. The cost of any particular
facility may vary considerably based on a variety of site-specific factors.
The Company's development activities are coordinated by its
experienced 18-person development staff, which has extensive real estate
acquisition, engineering, general construction and project management
experience. Architectural design and hands-on construction functions are
usually contracted to experienced outside architects and contractors.
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The following table sets forth certain information regarding Sunrise
model facilities that either are owned and under construction or are subject to
purchase contracts and zoned:
<TABLE>
<CAPTION>
ESTIMATED
DEVELOPMENT COMPLETION RESIDENT OWNERSHIP
FACILITY LOCATION PHASE(1) DATE(2) CAPACITY PERCENTAGE
-------- -------- -------- ------- -------- ----------
<S> <C> <C> <C> <C> <C>
Sunrise of Petaluma Petaluma, CA Construction 1st Q 1997 84 100.0%(3)(5)
Sunrise of Abington Philadelphia, PA Construction 2nd Q 1997 97 100.0
Building I metro region
Sunrise of Abington Philadelphia, PA Construction 2nd Q 1997 71 100.0
Building II metro region
Sunrise of Granite Run Philadelphia, PA Construction 2nd Q 1997 95 100.0
metro region
Sunrise of Severna Park Severna Park, MD Construction 2nd Q 1997 99 50.0(4)(5)
Building I
Sunrise of Severna Park Severna Park, MD Construction 2nd Q 1997 74 50.0(4)(5)
Building II
Sunrise of Springfield Springfield Construction 2nd Q 1997 98 100.0
Sunrise of Old Tappan Old Tappan, NJ Construction 2nd Q 1997 95 100.0
Sunrise of Morris Plains Morris Plains, NJ Construction 2nd Q 1997 95 100.0
Sunrise of Rockville Rockville, MD Construction 3rd Q 1997 86 100.0
Sunrise of Alexandria Alexandria, VA Construction 3rd Q 1997 92 100.0(6)
Sunrise of Wayne Wayne, NJ Construction 3rd Q 1997 90 100.0
Sunrise of Westfield Westfield, NJ Construction 3rd Q 1997 95 100.0
Sunrise of Norwood Boston, MA Construction 3rd Q 1997 90 100.0
metro region
Sunrise of Wayland Boston, MA Construction 3rd Q 1997 68 100.0
metro region
Sunrise of Fresno Fresno, CA Construction 4th Q 1997 84 100.0(3)(5)
Sunrise of East Cobb Atlanta, GA Construction 4th Q 1997 96 100.0
metro region
Sunrise of Decatur Decatur, GA Construction 4th Q 1997 96 100.0
Sunrise of Haverford Haverford, PA Construction 1st Q 1998 73 100.0
Sunrise of Glen Cove Glen Cove, NY Construction 1st Q 1998 80 100.0
Sunrise at Ivey Ridge Atlanta, GA Construction 1st Q 1998 97 100.0
metro region
Sunrise of Walnut Creek Walnut Creek, CA Construction 1st Q 1998 85 100.0
Sunrise of Cohasset Cohasset, MA Zoned 1st half 1998 71 100.0
Sunrise of Pinehurst Denver, CO Zoned 1st half 1998 100 100.0
Sunrise of Holly Denver, CO Zoned 1st half 1998 97 100.0
metro region
Sunrise of Danville Danville, CA Zoned 2nd half 1998 84 100.0
Sunrise of Huntcliff Atlanta, GA Zoned 2nd half 1998 96 100.0
Summit (Assisted Living
Expansion)
Sunrise of Paramus Paramus, NJ Zoned 2nd half 1998 75 100.0
--------
Total 2,463
=======
</TABLE>
- ----------
(1) The Alexandria and Rockville facilities under construction are subject to
one or more mortgages or deeds of trust that mature between April 2001 and
April 2003 and bear interest at rates currently
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averaging approximately 8.4%. The Abington, Granite Run, Franconia, Old
Tappan, Morris Plains, and Wayne and Norwood facilities are financed under
one of the Company's credit facilities and are subject to one or more
mortgages or deeds of trust that mature June 2001 and currently bear
interest at a rate of approximately 8.4%. Norwood and Wayland facilities
are financed under another one of the Company's credit facilities and are
subject to one or more mortgages or deeds of trust that mature April 2002
and currently bear interest at a rate of approximately 8.1%.
(2) There can be no assurance that construction delays will not be experienced.
(3) Not a Sunrise model facility. Sunrise has entered into an operating lease
with a third-party owner/developer who will complete the facility under a
design reviewed and approved by Sunrise.
(4) The remaining ownership interests are owned by unaffiliated third parties.
Sunrise is the general partner or managing member of the limited
partnership or limited liability company, respectively, that will lease the
facility.
(5) Will be operated under a 15-year operating lease, with two 10-year
extension options.
(6) Subject to a long-term ground lease.
The Company has entered into purchase contracts for 21 additional
sites and leases for two additional sites in North Carolina, Pennsylvania,
Massachusetts, New Jersey, Connecticut, New York, Georgia, Illinois, Colorado,
California and Washington. The Company has completed preliminary feasibility
studies and submitted rezoning requests on five of such sites and is conducting
preliminary feasibility studies on the remaining sites. The Company's
development team is negotiating purchase terms on 18 additional sites
identified for development.
The Company's ability to achieve its development plans will depend
upon a variety of factors, many of which are beyond the Company's control.
There can be no assurance that the Company will not suffer delays in its
development program, which could slow the Company's growth. The successful
development of additional assisted living facilities will involve a number of
risks, including the possibility that the Company may be unable to locate
suitable sites at acceptable prices or may be unable to obtain, or may
experience delays in obtaining, necessary zoning, land use, building,
occupancy, licensing and other required governmental permits and
authorizations. The Company may also incur construction costs that exceed
original estimates, may not complete construction projects on schedule and may
experience competition in the search for suitable development sites. The
Company relies on third-party general contractors to construct its new assisted
living facilities. There can be no assurance that the Company will not
experience difficulties in working with general contractors and subcontractors,
which could result in increased construction costs and delays. Further,
facility development is subject to a number of contingencies over which the
Company will have little control and that may adversely affect project cost and
completion time, including shortages of, or the inability to obtain, labor or
materials, the inability of the general contractor or subcontractors to perform
under their contracts, strikes, adverse weather conditions and changes in
applicable laws or regulations or in the method of applying such laws and
regulations. Accordingly, if the Company is unable to achieve its development
plans, its business, financial condition and results of operations could be
adversely affected.
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FACILITY ACQUISITIONS
The Company and its predecessors have completed 13 acquisitions,
including the five Southeast Properties, the California Property, five
acquisitions of long-term care facilities which have been repositioned to
provide Sunrise assisted living services and two acquisitions of Sunrise model
facilities initially developed for third parties. During the next three years,
the Company plans to acquire up to 9 additional assisted living facilities or
other properties that can be repositioned as Sunrise assisted living
facilities. On January 10, 1997 the Company entered into three
purchase-and-sale agreements, giving the Company the right to purchase three
properties in Northern California for $17.6 million. The properties include a
74-unit assisted living community in the Napa Valley; a 73-unit assisted living
property in Walnut Creek that is currently under construction (acquired by the
Company on February 24, 1997); and a 3.5 acre site in Oakland Hills on which
the Company plans to build a 75- to 80- unit assisted living facility. Because
the purchase-and-sale agreements are subject to, among other things, the
satisfactory completion by the Company of a financial, accounting, regulatory
and property due diligence review, there is no assurance that the acquisition
of the remaining two properties will be consummated. In evaluating possible
acquisitions, the Company considers, among other factors, (i) location,
construction quality, condition and design of the facility, (ii) current and
projected facility cash flow, (iii) the ability to increase revenue, occupancy
and cash flow by providing a full range of assisted living services, (iv) costs
of facility repositioning (including renovations, if any) and (v) the extent to
which the acquisition will complement the Company's development plans.
There can be no assurance that the Company's acquisition of assisted
living facilities will be completed at the rate currently expected, if at all.
The success of the Company's acquisitions will be determined by numerous
factors, including the Company's ability to identify suitable acquisition
candidates, competition for such acquisitions, the purchase price, the
financial performance of the facilities after acquisition and the ability of
the Company to integrate effectively the operations of acquired facilities. Any
failure by the Company to integrate or operate acquired facilities effectively
may have a material adverse effect on the Company's business, financial
condition and results of operations.
NEED FOR ADDITIONAL FINANCING
To achieve its growth objectives, the Company will need to obtain
substantial additional resources to fund its development, construction and
acquisition activities. See "Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operation." The Company expects that the
number of owned and operated facilities will increase substantially as it
pursues its development and acquisition programs for new assisted living
facilities. This rapid growth will place significant demands on the Company's
management resources. The Company's ability to manage its growth effectively
will require it to continue to expand its operational, financial and management
information systems and to continue to attract, train, motivate, manage and
retain key employees. If the Company is unable to manage its growth
effectively, its business, financial condition and results of operations could
be adversely affected.
COMPANY OPERATIONS
OPERATING STRUCTURE
The Company has centralized accounting, finance and other operational
functions at the corporate headquarters and regional office levels in order to
allow facility-based personnel to focus on resident care, consistent with the
Company's operating philosophy. Headquarters staff members in Fairfax, Virginia
are responsible for: the establishment of Company-wide policies and procedures
relating to, among other things, resident care, facility design and facility
operations; billing and collection; accounts payable; finance and accounting;
management of the Company's development and
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<PAGE> 14
acquisition activities; development of employee training materials and
programs; and providing overall strategic direction to the Company. Regional
staff are responsible for: overseeing all aspects of facility-based operations,
including marketing activities; resident care; the hiring of Administrators,
Care Managers and other facility-based personnel; compliance with applicable
local and state regulatory requirements; and implementation of the Company's
development and acquisition plans within a given geographic region.
The Company is currently organized into several regions. Each of the
regions is headed by a Regional Senior Vice President with extensive experience
in the long-term care and assisted living industries. The regional staff
typically consists of a Marketing Specialist, a Resident Care Specialist and a
Human Resources Specialist. The Company's largest region (the Mid-Atlantic)
also has separate Marketing Specialists for existing facilities and those in
development, an Activities Specialist, a Regulatory Specialist, a Dietary
Specialist and a Maintenance Specialist. The Company expects that all regions
will create similar staff positions as the number of facilities in those
regions increases.
FACILITY STAFFING
Each of the Company's facilities has an Administrator responsible for
the day-to-day operations of the facility, including quality of care, social
services and financial performance. Each Administrator receives specialized
training from the Company. The Company believes that the quality and size of
its facilities, coupled with its competitive compensation philosophy, have
enabled it to attract high-quality, professional Administrators. The
Administrator is supported by the Director of Resident Care, a nurse who
oversees the Care Managers and is directly responsible for day-to-day care of
the residents, and by the Director of Community Relations, who oversees
marketing and outreach programs. Other key positions include the Director of
Dining Services, the Activities Director, and in certain homes, the Director of
Alzheimer's Care.
Care Managers, who work on full-time, part-time and flex-time
schedules, provide most of the hands-on resident care, such as bathing,
dressing and other personalized care services (including housekeeping, meal
service and resident activities). To the extent permitted by state law, nurses,
or Care Managers who complete a special training program, supervise the storage
and distribution of medications. The use of Care Managers to provide
substantially all services to residents has the benefits of consistency and
continuity in resident care. In most cases, the same Care Manager assists the
resident in dressing, dining and coordinating daily activities. The number of
Care Managers working in a facility varies according to the level of care
required by the residents of the facility and the numbers of residents
receiving Alzheimer's Care and Plus Care services. The number of Care Managers
ranges from three (Leesburg facility) to 20 (Atrium facility) on the day shifts
and from two Care Managers (Leesburg) to seven Care Managers (Atrium) on the
night shift.
The Company believes that its facilities can be most efficiently
managed by maximizing direct resident and staff contact. Employees involved in
resident care, including the administrative staff, are trained in the Care
Manager duties and participate in supporting the care needs of the residents.
Accounting functions are centralized so that administrative staff may devote
substantially all of their time to care giving.
STAFF EDUCATION AND TRAINING
The Company has attracted, and continues to seek, highly dedicated,
experienced personnel. The Company has adopted formal training procedures and
review and evaluation procedures to help ensure quality care for its residents.
The Company believes that education, training and development enhance the
effectiveness of its employees. All employees are required to complete the
Company's training program, which centers around its proprietary "Five-Star
Educational Program." This program includes a core curriculum consisting of
care basics, Alzheimer's care, resident care
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<PAGE> 15
procedures and communication skills. For Care Managers who desire to advance
into facility management, the Five-Star Education Program provides additional
training in medical awareness and management skills. There are also leadership
certifications in areas such as community relations, facility management,
recruiting, staffing, human resources and regulations. Sunrise also has
developed an "Administrator-in-Training ("AIT") Program" that places an
Administrator trainee in an existing facility to learn the position based on
hands-on experience and direct supervision from a current Administrator. The
AIT Program is intended to ensure that enough Sunrise-trained professionals
will be available to manage acquired and newly developed facilities.
QUALITY ASSURANCE
The Company coordinates quality assurance programs at each of its
facilities through its corporate headquarters staff and through its regional
offices. The Company's commitment to quality assurance is designed to achieve a
high degree of resident and family member satisfaction with the care and
services provided by the Company. In addition to ongoing training and
performance reviews of Care Managers and other employees, the Company's quality
control measures include:
Family and Resident Feedback. The Company surveys residents and family
members on a regular basis to monitor the quality of services provided to
residents. Approximately 30 days after moving into a facility, a resident or
family member is surveyed by a Sunrise representative to inquire about their
initial level of satisfaction. Thereafter, annual written surveys are used to
appraise and monitor the level of satisfaction of residents and their families.
A toll-free telephone line also is maintained which may be used at any time by
a resident's family members to convey comments.
Regular Facility Inspections. Facility inspections are conducted by
regional vice presidents and other regional staff on at least a monthly basis.
These inspections cover: the appearance of the exterior and grounds; the
appearance and cleanliness of the interior; the professionalism and
friendliness of staff; resident care plans; the quality of activities and the
dining program; observance of residents in their daily living activities; and
compliance with government regulations.
Third-Party Reviews. To further evaluate customer service, the Company
engages an independent service evaluation company to "mystery shop" the
Company's facilities. These professionals assess the Company's performance from
the perspective of a customer, without the inherent biases of a Company
employee. Each facility is "shopped" at least three times per year in person,
as well as one or more times per month by telephone. To evaluate medication
management, third-party pharmacists conduct periodic reviews of on-site
handling and storage of medications, record-keeping and coordination of
medications.
MARKETING AND SALES
The Company's marketing strategy is intended to create awareness of
the Company and its services among potential residents and their family members
and referral sources, such as hospital discharge planners, physicians, clergy,
area agencies for the elderly, skilled nursing facilities, home health agencies
and social workers. A central marketing staff develops overall strategies for
promoting the Company throughout its markets and monitors the success of the
Company's marketing efforts. Each regional office generally has at least one
Marketing Specialist and each facility typically has a Director of Community
Relations who oversees marketing and outreach programs. In addition to direct
contacts with prospective referral sources, the Company also relies on print
advertising, yellow pages advertising, direct mail, signage and special events,
such as grand openings for new facilities, health fairs and community
receptions.
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<PAGE> 16
THIRD-PARTY RESIDENT SERVICES
While the Company serves the vast majority of a resident's needs with
its own staff, certain services, such as physician care, infusion therapy,
physical and speech therapy and other home health care services, may be
provided to residents at Sunrise facilities by third parties. Company staff
assist residents in locating qualified providers for such health care services.
On October 8, 1996, the Company entered into an affiliation agreement with
Jefferson Health System ("JHS"), an integrated health care system located in
Philadelphia, Pennsylvania, pursuant to which JHS has agreed to provide
residents of Sunrise facilities located in the Philadelphia metropolitan
region, on a preferred (but non-exclusive) basis, with access to certain health
care services offered by JHS. Such health care services may include hospital
services, physician services, rehabilitation services, home health services and
products and mental health services.
COMPETITION
The long-term care industry is highly competitive and the Company
believes that the assisted living segment, in particular, will become even more
competitive in the future. The Company will be competing with numerous other
companies providing similar long-term care alternatives such as home health
care agencies, facility-based service programs, retirement communities and
convalescent centers. In general, regulatory and other barriers to competitive
entry in the assisted living industry are not substantial. In pursuing its
growth strategy, the Company expects to face competition in its efforts to
develop and acquire assisted living facilities. Some of the Company's present
and potential competitors are significantly larger and have, or may obtain,
greater financial resources than the Company. Consequently, there can be no
assurance that the Company will not encounter increased competition that could
limit its ability to attract residents or expand its business and that could
have a material adverse effect on its business, financial condition and results
of operations. Moreover, if the development of new assisted living facilities
outpaces demand for those facilities in certain markets, such markets may
become saturated. Such an oversupply of facilities could cause the Company to
experience decreased occupancy, depressed margins and lower operating results.
Providers of assisted living and related services compete for residents
primarily on the basis of quality of care, price, reputation, physical
appearance of the facilities, services offered, family and physician
preferences and location. As assisted living receives increased attention, the
Company believes that competition will grow from new local and regional
companies that operate, manage and develop assisted living facilities within
the same geographic areas as the Company.
STAFFING AND LABOR COSTS
The Company competes with various health care services providers,
including other elderly care providers, in attracting and retaining qualified
or skilled personnel. A shortage of nurses or other trained personnel or
general inflationary pressures may require the Company to enhance its wage and
benefits package to compete effectively for personnel. In anticipation of the
Company's growth plans, the Company's general and administrative expenses
(which consist primarily of staffing and labor expenses, including hiring
additional staff and increasing the salary and benefits of existing staff) have
increased from 12.3% of operating revenue for 1994 to 18.5% of operating
revenue for 1995 and 21.2% of operating revenue for 1996. There can be no
assurance that the Company's labor costs will not continue to increase as a
percentage of operating revenue. Any significant failure by the Company to
attract and retain qualified employees, to control its labor costs or to match
increases in its labor expenses with corresponding increases in revenues could
have a material adverse effect on the Company's business, financial condition
and results of operations.
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<PAGE> 17
GOVERNMENT REGULATION
The Company's facilities are subject to regulation and licensing by
state and local health and social service agencies and other regulatory
authorities, although requirements vary from state to state. In general, these
requirements address, among other things: personnel education, training, and
records; facility services, including administration of medication, assistance
with self-administration of medication, and limited nursing services;
monitoring of resident wellness; physical plant specifications; furnishing of
resident units; food and housekeeping services; emergency evacuation plans; and
resident rights and responsibilities, including in some states the right to
receive certain health care services from providers of a resident's choice.
Certain of the Company's facilities are also licensed to provide independent
living services which generally involve lower levels of resident assistance. In
several states in which the Company operates or intends to operate, assisted
living facilities also require a certificate of need before the facility can be
opened. In most states, assisted living facilities also are subject to state or
local building code, fire code and food service licensure or certification
requirements. Like other health care facilities, assisted living facilities are
subject to periodic survey or inspection by governmental authorities. From time
to time in the ordinary course of business, the Company receives deficiency
reports. The Company reviews such reports and seeks to take appropriate
corrective action. Although most inspection deficiencies are resolved through a
plan of correction, the reviewing agency typically is authorized to take action
against a licensed facility where deficiencies are noted in the inspection
process. Such action may include imposition of fines, imposition of a
provisional or conditional license or suspension or revocation of a license or
other sanctions.
Any failure by the Company to comply with applicable requirements
could have a material and adverse effect on the Company's business, financial
condition and results of operations. Regulation of the assisted living industry
is evolving and the Company's operations could also be adversely affected by,
among other things, future regulatory developments such as mandatory increases
in scope and quality of care to be afforded residents and revisions to
licensing and certification standards. Increased regulatory requirements could
increase costs of compliance with such requirements.
Virginia state and local authorities initiated actions in 1995
alleging that the Company permitted non-ambulatory residents to reside at the
Company's Gunston and Countryside facilities in violation of state licensure
requirements and the state building code. The Company entered into consent
decrees, pursuant to which it agreed to permit only ambulatory residents to
reside at the facilities until the buildings had been upgraded to meet more
stringent fire code requirements for non-ambulatory residents. During 1995, the
Company made capital improvements to these two facilities at an aggregate cost
of approximately $1.1 million. The Company recently has received the issuance
of new licenses that would enable non-ambulatory residents to reside at these
facilities. The Countryside license is provisional requiring reinspection by
May 31, 1997.
The Company also is subject to Federal and state anti-remuneration
laws, such as the Medicare/ Medicaid anti-kickback law which govern certain
financial arrangements among health care providers and others who may be in a
position to refer or recommend patients to such providers. These laws prohibit,
among other things, certain direct and indirect payments that are intended to
induce the referral of patients to, the arranging for services by, or the
recommending of, a particular provider of health care items or services. The
Medicare/Medicaid anti-kickback law has been broadly interpreted to apply to
certain contractual relationships between health care providers and sources of
patient referral. Similar state laws vary from state to state, are sometimes
vague and seldom have been interpreted by courts or regulatory agencies.
Violation of these laws can result in loss of licensure, civil and criminal
penalties, and exclusion of health care providers or suppliers from
participation in (i.e., furnishing covered items or services to beneficiaries
of) the Medicare and Medicaid programs. There can be no assurance that such
laws will be interpreted in a manner consistent with the practices of the
Company.
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<PAGE> 18
Management is not aware of any non-compliance by the Company with
applicable regulatory requirements that would have a material adverse effect on
the Company's financial condition or results of operations.
ENVIRONMENTAL RISKS
Under various federal, state and local environmental laws, ordinances
and regulations, a current or previous owner or operator of real property may
be held liable for the cost of removal or remediation of certain hazardous or
toxic substances, including, without limitation, asbestos-containing materials,
that could be located on, in or under such property. Such laws and regulations
often impose liability whether or not the owner or operator knew of, or was
responsible for, the presence of the hazardous or toxic substances. The costs
of any required remediation or removal of these substances could be substantial
and the liability of an owner or operator as to any property is generally not
limited under such laws and regulations and could exceed the property's value
and the aggregate assets of the owner or operator. The presence of these
substances or failure to remediate such substances properly may also adversely
affect the owner's ability to sell or rent the property, or to borrow using the
property as collateral. Under these laws and regulations, an owner, operator or
an entity that arranges for the disposal of hazardous or toxic substances, such
as asbestos-containing materials, at a disposal site may also be liable for the
costs of any required remediation or removal of the hazardous or toxic
substances at the disposal site. In connection with the ownership or operation
of its properties, the Company could be liable for these costs, as well as
certain other costs, including governmental fines and injuries to persons or
properties. As a result, the presence, with or without the Company's knowledge,
of hazardous or toxic substances at any property held or operated by the
Company, or acquired or operated by the Company in the future, could have an
adverse effect on the Company's business, financial condition and results of
operations. Environmental audits performed on the Company's properties have not
revealed any significant environmental liability that management believes would
have a material adverse effect on the Company's business, financial condition
or results of operations. No assurance can be given that existing environmental
audits with respect to any of the Company's properties reveal all environmental
liabilities.
LIABILITY AND INSURANCE
The Company's business entails an inherent risk of liability. In
recent years, participants in the long-term care industry, including the
Company, have become subject to an increasing number of lawsuits alleging
negligence or related legal theories, many of which involve large claims and
significant legal costs. The Company is from time to time subject to such suits
as a result of the nature of its business. The Company currently maintains
insurance policies in amounts and with such coverage and deductibles as it
believes are adequate, based on the nature and risks of its business,
historical experience and industry standards. The Company also currently
maintains professional liability insurance and general liability insurance. The
Company's medical professional liability coverage is limited to $1,000,000 per
occurrence and $3,000,000 in the aggregate for all claims per annual policy
period. The non-medical professional liability insurance coverage is limited to
$5,000,000 per wrongful act and $7,000,000 in the aggregate. The general
liability insurance is limited to $1,000,000 per facility/per event, with
additional specific limitations of $100,000 per event (premises damage), $5,000
per event (medical expenses) and $1,000 per event (resident's property damage).
The Company also has an umbrella excess liability protection policy in the
total amount of $25,000,000. There can be no assurance that claims will not
arise which are in excess of the Company's insurance coverage or are not
covered by the Company's insurance coverage. A successful claim against the
Company not covered by, or in excess of, the Company's insurance could have a
material adverse effect on the Company's financial condition and results of
operations. Claims against the Company, regardless of their merit or eventual
outcome, may also have a material adverse effect on the Company's ability to
attract residents or expand its business and would require management to devote
time to matters unrelated to the operation of the Company's business. In
addition, the
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<PAGE> 19
Company's insurance policies must be renewed annually and there can be no
assurance that the Company will be able to continue to obtain liability
insurance coverage in the future or, if available, that such coverage will be
available on acceptable terms.
EMPLOYEES
At December 31, 1996, the Company had 2,275 employees, including 1,385
full-time employees, of which 97 were employed at the Company's headquarters.
The Company believes employee relations are good.
ITEM 2. PROPERTIES.
The Company leases its corporate and regional office space under
various leases. The leases have terms of five years with an option to terminate
after twelve months from the most recent expansion commencement, or January 1,
1997. The initial annual lease payments amount to $258,000, and the base rent
is subject to annual increases based on the Consumer Price Index from a minimum
of 2% to a maximum cap of 3% per year. Various other leases expire on June 15,
1999 and September 30, 2001.
The Company also has entered into operating leases for four facilities
and long-term ground lease related to another facility, each of which are
currently under construction and are expected to commence operation in 1997.
The operating lease terms vary from fifteen years, with two ten-year extension
options to seventy-three years. The ground lease has a term of ninety-nine
years. For information regarding facilities owned by the Company or in which it
holds interests, see "Item 1. Business -- Owned Facilities" and "-- Facility
Development."
ITEM 3. LEGAL PROCEEDINGS.
The Company is involved in various lawsuits and claims arising in the
normal course of business. In the opinion of management of the Company,
although the outcomes of these suits and claims are uncertain, in the aggregate
they should not have a material adverse effect on the Company's business,
financial condition and results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The Company's Common Stock is traded on the Nasdaq National Market
under the symbol "SNRZ." Other information set forth under the caption
"Corporate Information" on page 37 of the Company's 1996 Annual Report to
Stockholders is incorporated by reference herein.
On January 19, 1996, the Company issued an aggregate of 1,000,000
shares of Series B Exchangeable Preferred Stock to three institutional
investors and certain affiliates thereof for $10,000,000. These securities were
issued without registration under the Securities Act of 1933, as amended (the
"Securities Act"), in reliance upon the exemption in Section 4(2) of the
Securities Act.
On March 19, 1996, the Company issued warrants covering 50,000 shares
of Common Stock to a lender. The warrants have a per share exercise price equal
to $17.00. These securities were issued
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<PAGE> 20
without registration under the Securities Act, in reliance upon the exemption
in Section 4(2) of the Securities Act.
On May 28, 1996, the Company issued 52,500 shares of Common Stock to a
director of the Company in exchange for a 30% membership interest held by the
director in one of the Company's facilities. These securities were issued
without registration under the Securities Act, in reliance upon the exemption
in Section 4(2) of the Securities Act.
ITEM 6. SELECTED FINANCIAL DATA.
The information set forth under the caption "Selected Financial and
Operating Data" on page 18 of the Company's 1996 Annual Report to Stockholders
is incorporated by reference herein.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATION
The information set forth under the caption "Management's Discussion
and Analysis of Financial Condition and Results of Operations" on pages 19 to
23 of the Company's 1996 Annual Report to Stockholders is incorporated by
reference herein.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The consolidated and combined financial statements set forth on pages
24 to 34 of the Company's 1996 Annual Report to Stockholders are incorporated
by reference herein.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
Not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The information set forth under the captions "Election of Directors --
Information as to Nominees and Other Directors," "-- Other Executive Officers,"
and "Section 16(a) Beneficial Ownership Reporting Compliance" on pages 2 to 5
and 14 in the Company's 1997 Annual Meeting Proxy Statement is incorporated by
reference herein.
ITEM 11. EXECUTIVE COMPENSATION.
The information set forth under the captions "Compensation of
Directors" and "Executive Compensation and Other Information" on pages 7 and 8
to 11 in the Company's 1997 Annual Meeting Proxy Statement is incorporated
herein by reference.
ITEM 12. SECURITIES OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information set forth under the captions "Stock Owned by
Management" and "Principal Holders of Voting Securities" on pages 24 to 27 of
the Company's 1997 Annual Meeting Proxy Statement is incorporated by reference
herein.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information set forth under the caption "Certain Transactions" on
page 14 and 15 of the Company's 1997 Annual Meeting Proxy Statement is
incorporated by reference herein.
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PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) List of documents filed as part of Form 10-K.
(1) Financial Statements:
Consolidated Balance Sheets -- December 31, 1996 and 1995.
Consolidated Statements of Operations for the years ended
December 31, 1996 and 1995 and Combined Statement of
Operations of Sunrise Entities for the year ended
December 31, 1994.
Consolidated Statements of Changes in Stockholders'
(Deficit) Equity and Combined Statement of Owners' Deficit of
Sunrise Entities.
Consolidated Statements of Cash Flows for the years
ended December 31, 1996 and 1995 and Combined Statement of
Cash Flows of Sunrise Entities for the year ended December
31, 1994.
Notes to Consolidated and Combined Financial Statements.
Report of Independent Auditors.
The remaining information appearing in the Company's 1996
Annual Report to Stockholders is not deemed to be filed as
part of this Report, except as expressly provided herein.
(2) Financial Statements Schedules:
All schedules for which provision is made in the applicable
accounting regulations of the Securities and Exchange
Commission are not required under the related instructions or
are inapplicable or are included in the consolidated
financial statements.
(3) Exhibits:
The Exhibits filed as part of this Annual Report on Form 10-K
are listed on the Index to Exhibits on pages 25 to 30 and are
incorporated by reference herein.
(b) Reports on Form 8-K.
None.
(c) Exhibits.
The Company hereby files as part of this Annual Report on Form
10-K the Exhibits listed in the Index to Exhibits.
(d) Financial Statement Schedules.
Not applicable.
-21-
<PAGE> 22
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
SUNRISE ASSISTED LIVING, INC.
-----------------------------
Registrant
By: /s/ PAUL J. KLAASSEN
-----------------------------
Paul J. Klaassen
Chairman of the Board,
President and Chief Executive
Officer
3/26/97
-----------------------------
Date
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
By: /s/ PAUL J. KLAASSEN 3/26/97
--------------------------------- -----------------------------
Paul J. Klaassen Date
Chairman of the Board, President
and Chief Executive Officer
(Principal Executive Officer)
By: /s/ DAVID W. FAEDER 3/31/97
--------------------------------- -----------------------------
David W. Faeder Date
Executive Vice President, Chief
Financial Officer and Director
(Principal Financial Officer)
By: /s/ LARRY E. HULSE 3/31/97
--------------------------------- -----------------------------
Larry E. Hulse Date
Controller
(Principal Accounting Officer)
By: /s/ RONALD V. APRAHAMIAN 3/26/97
--------------------------------- -----------------------------
Ronald V. Aprahamian Date
Director
-22-
<PAGE> 23
By:
--------------------------------- -----------------------------
Thomas J. Donohue Date
Director
By: /s/ RICHARD A. DOPPELT 3/26/97
--------------------------------- -----------------------------
Richard A. Doppelt Date
Director
By: /s/ TERESA M. KLAASSEN 3/31/97
--------------------------------- -----------------------------
Teresa M. Klaassen Date
Executive Vice President,
Secretary and Director
By: /s/ SCOTT F. MEADOW 3/27/97
--------------------------------- -----------------------------
Scott F. Meadow Date
Director
By: /s/ DARCY J. MOORE 3/26/97
--------------------------------- -----------------------------
Darcy J. Moore Date
Director
By: /s/ TIMOTHY S. SMICK 3/31/97
--------------------------------- -----------------------------
Timothy S. Smick Date
Executive Vice President,
Chief Operating Officer and Director
-23-
<PAGE> 24
INDEX TO EXHIBITS
Page (by
Sequential
Exhibit Numbering
Number Identity of Exhibit System)
- ------ ------------------- -------
2.1 Purchase and Sale Agreement dated July 31, 1996
between the Company and Laing Properties &
Subsidiaries, Inc. (Exhibit 2.1 to the Company's Form
S-1 Registration No. 333-13731).
2.2 Purchase Agreement dated October 4, 1996 by and
between Sunrise Development, Inc., a wholly owned
subsidiary of the Company, and Birtcher Properties,
Ltd. (Exhibit 2.1 to the Company's Form 8-K dated
February 17, 1997).
2.3 Amendment to Purchase Agreement dated December 5, 1996
between Sunrise Development, Inc. and Birtcher
Properties, Ltd. (Exhibit 2.2 to the Company's Form
8-K dated February 17, 1997).
3.1 Restated Certificate of Incorporation of the Company
(Exhibit 3.1 to the Company's Form S-1 Registration
Statement No. 333- 13731).
3.2 Amended and Restated Bylaws of the Company (Exhibit
3.2 to the Company's Form S-1 Registration Statement
No. 333-13731).
4.1 Form of Common Stock certificate (Exhibit 4.1 to the
Company's Form S-1 Registration Statement No.
333-13731).
4.2 Stockholder Rights Agreement (Exhibit 4.2 to the
Company's Form S-1 Registration Statement No.
333-13731).
10.1 Assignment and Contribution Agreement, effective as of
January 4, 1995, by and between Paul and Teresa
Klaassen and the Company (Exhibit 10.1.1 to the
Company's Form S-1 Registration Statement No.
333-2582).
10.2 Assignment and Contribution Agreement, dated as of
January 4, 1995, by and between Paul J. Klaassen and
Teresa M. Klaassen, Sunrise Partners, L.P. and Sunrise
Assisted Living Investments, Inc. (Exhibit 10.1.2 to
the Company's Form S-1 Registration Statement No.
333-2582).
-24-
<PAGE> 25
Page (by
Sequential
Exhibit Numbering
Number Identity of Exhibit System)
- ------ ------------------- -------
10.3 Letter Agreement, dated January 4, 1995, from Paul J.
Klaassen and Teresa M. Klaassen to the Series A
Preferred Stockholders regarding cash distributions
from Sunrise Retirement Investments, Inc., Sunrise
Terrace of Gunston, Inc., Sunrise Terrace of
Countryside, Inc. and Sunrise Atrium, Inc. (Exhibit
10.19 to the Company's Form S-1 Registration Statement
No. 33-2852).
10.4 Series A and Series B Preferred Stock Purchase
Agreement, dated as of December 19, 1994, by and
between the Company and the purchasers listed therein
(Exhibit 10.2 to the Company's Form S-1 Registration
No. 333-2582).
10.5 Registration Agreement, dated January 4, 1995, by
and among the Company, the Investors (as defined
therein) and Paul and Teresa Klaassen (Exhibit 10.3
to the Company's Form S-1 Registration Statement No.
333-2582).
10.6 Promissory Note, dated June 8, 1994, executed by
Sunrise Assisted Living Limited Partnership in favor
of General Electric Capital Corporation (Exhibit 10.4
to the Company's Form S-1 Registration Statement No.
333-2582).
10.7 Indemnity Agreement dated as of June 8, 1994 by Paul
J. Klaassen and Teresa M. Klaassen to and for the
benefit of General Electric Capital Corporation
(Exhibit 10.4.1 to the Company's Form S-1 Registration
Statement No. 333-2582).
10.8 First Loan Modification Agreement dated as of February
15, 1996 by and between General Electric Capital
Corporation and Sunrise Assisted Living Limited
Partnership (Exhibit 10.4.2 to the Company's Form S-1
Registration Statement No. 333-2582).
10.9 Second Loan Modification Agreement dated as of May 1,
1996 by and between General Electric Capital
Corporation and Sunrise Assisted Living Limited
Partnership (Exhibit 10.4.3 to the Company's Form S-1
Registration Statement No. 333-2582).
-25-
<PAGE> 26
Page (by
Sequential
Exhibit Numbering
Number Identity of Exhibit System)
- ------ ------------------- -------
10.10 Letter Agreement dated as of May 1, 1996 by and
between General Electric Capital Corporation and
Sunrise Assisted Living Limited Partnership (Exhibit
10.4.4 to the Company's Form S-1 Registration
Statement No. 333-2582).
10.11 Letter agreement dated as of December 30, 1996 by and
between General Electric Capital Corporation and
Sunrise Assisted Living Partnership.
10.12 Third Loan Modification Agreement dated as of March 4,
1997 by and between General Electric Capital
Corporation and Sunrise Assisted Living Limited
Partnership.
10.13 Credit Line Deed of Trust and Security Agreement,
Assignment of Leases and Rents, Fixture Filing and
Financing Statement, dated as of June 8, 1994
(Arlington, Bluemont Park and Falls Church) (Exhibit
10.5 to the Company's Form S-1 Registration Statement
No. 333-2582).
10.14 Credit Line Deed of Trust and Security Agreement,
Assignment of Leases and Rents, Fixture Filing and
Financing Statement, dated as of June 8, 1994 (Gunston
and Oakton) (Exhibit 10.6 to the Company's Form S-1
Registration Statement No. 333-2582).
10.15 Credit Line Deed of Trust and Security Agreement,
Assignment of Leases and Rents, Fixture Filing and
financing Statement, dated as of June 8, 1994 (Fairfax
Leasehold) (Exhibit 10.7 to the Company's Form S-1
Registration Statement No. 333-2582).
10.16 Credit Line Deed of Trust and Security Agreement,
Assignment of Leases and Rents, Fixture Filing and
Financing Statement, dated as of June 8, 1994
(Warrenton) (Exhibit 10.8 to the Company's Form S-1
Registration Statement No. 333-2582).
10.17 Credit Line Deed of Trust and Security Agreement,
Assignment of Leases and Rents, Fixture Filing and
Financing Statement, dated as of June 8, 1994
(Countryside and Leesburg) (Exhibit 10.9 to the
Company's Form S-1 Registration Statement No.
333-2582).
-26-
<PAGE> 27
Page (by
Sequential
Exhibit Numbering
Number Identity of Exhibit System)
- ------ ------------------- -------
10.18 First Mortgage and Security Agreement, Assignment of
Leases and Rents, Fixture Filing and Financing
Statement, dated as of June 8, 1994 (Boca Raton)
(Exhibit 10.10 to the Company's Form S-1 Registration
Statement No. 333-2582).
10.19 First Deed of Trust and Security Agreement, Assignment
of Leases and Rents, Fixture Filing and Financing
Statement, dated as of June 8, 1994 (Frederick)
(Exhibit 10.11 to the Company's Form S-1 Registration
Statement No. 333-2582).
10.20 First Deed of Trust and Security Agreement, Assignment
of Leases and Rents, Fixture Filing and Financing
Statement, Dated as of June 8, 1994 (Mercer Island)
(Exhibit 10.12 to the Company's Form S-1 Registration
Statement No. 333-2582).
10.21 1995 Stock Option Plan, as amended (Exhibit 10.13 to
the Company's Form S-1 Registration Statement No.
333-2582).
10.22 1996 Directors' Stock Option Plan (Exhibit 10.13.1 to
the Company's Form S-1 Registration Statement No.
333-2582).
10.23 Stock Option Agreement, entered into, effective as of
January 4, 1995, by and between the Company and David
W. Faeder (Exhibit 10.14 to the Company's Form S-1
Registration Statement No. 333-2582).
10.24 Amendment No. 1 to Stock Option Agreement by and
between the Company and David W. Faeder (Exhibit
10.14.1 to the Company's Form S-1 Registration
Statement No. 333-13731).
10.25 1996 Non-Incentive Stock Option Plan (Exhibit 4.5 to
the Company's Form S-8 Registration Statement No.
333-21817).
10.26 Amended and Restated Lease Agreement and Assignment of
Leasehold Right, dated June 6, 1994, by and among
Barbara M. Volentine and Teresa M. Klaassen, the
Executor of the Estate of Eldon J. Merritt, Sunrise
Assisted Living Limited Partnership Assisted Living
Group -- Fairfax Associates, and Sunrise Foundation,
Inc. (Exhibit 10.15 to the Company's Form S-1
Registration Statement No. 333-2582).
-27-
<PAGE> 28
Page (by
Sequential
Exhibit Numbering
Number Identity of Exhibit System)
- ------ ------------------- -------
10.27 Ground Lease, dated June 7, 1994, by and between
Sunrise Assisted Living Limited Partnership and Paul
J. Klaassen and Teresa M. Klaassen (Exhibit 10.16 to
the Company's Form S-1 Registration Statement No.
333-2582).
10.28 Amended and Restated Agreement of Sublease,
Indemnification and Easements dated February 5, 1995
by and between Assisted Living Group -- Fairfax
Associates and Sunrise Foundation, as amended (Exhibit
10.17 to the Company's Form S-1 Registration Statement
No. 333-2582).
10.29 Sunrise Village House LLC Operating Agreement, dated
as of April 15, 1993, by and between Paul J. Klaassen
and Teresa M. Klaassen and Thomas Donohue and
Elizabeth Donohue, as amended (Exhibit 10.18 to the
Company's Form S-1 Registration Statement No.
333-2582).
10.30 Membership Interest Purchase Agreement among the
Company and Thomas and Elizabeth Donohue (Exhibit
10.23 to the Company's Form S-1 Registration Statement
No. 333-13731).
10.31 Loan Agreement, dated as of March 19, 1996, between
the Company and Creditanstalt-Bankverein (Exhibit
10.20 to the Company's Form S-1 Registration Statement
No. 333-2582).
10.32 Warrant Agreement, dated as of March 19, 1996, between
the Company and Creditanstalt-Bankverein (Exhibit
10.21 to the Company's Form S-1 Registration Statement
No. 333-2582).
10.33 Commitment Letter for $80,000,000 syndicated line of
credit for Construction/Interim Loans from
NationsBank, N.A. to an entity to be formed by Sunrise
Assisted Living, Inc. (Exhibit 10.22 to the Company's
Form S-1 Registration Statement No. 333-2582).
10.34 Form of Indemnification Agreement (Exhibit 10.24 to
the Company's Form S-1 Registration Statement No.
333-2582).
13 1996 Annual Report to Stockholders (which is not
deemed to be "filed" except to the extent that
portions thereof are expressly incorporated by
reference in this Annual Report on Form 10-K).
-28-
<PAGE> 29
Exhibit Numbering
Number Identity of Exhibit System)
- ------ ------------------- -------
21 Subsidiaries of the Company.
23 Consent of Ernst & Young LLP.
27 Financial Data Schedule.
-29-
<PAGE> 1
EXHIBIT 10.11
December 30, 1996
Sunrise Assisted Living Limited Partnership
c/o Sunrise Retirement Homes and Communities
9401 Lee Highway, Suite 300
Fairfax, Virginia 22031
Attn: Paul J. Klaassen, Chairman
Re: $95,000,000 loan (the "Loan") to Sunrise Assisted Living
Limited Partnership ("SALLP") from General Electric Capital
Corporation ("GECC") with respect to 12 assisted living
properties (the "Properties").
Dear Paul:
Reference is hereby made to the Loan from GECC ("Prior Lender") to
SALLP ("Borrower") which Loan is evidenced and secured, in part, by the Amended
and Restated Promissory Note dated June 6, 1996 (the "Note"), from Borrower to
Prior Lender, in the maximum principal amount of $87,000,000. Reference is
also hereby made to that certain letter from Prior Lender to Borrower dated May
1, 1996 (the "Transfer Letter", a copy of which is attached to this letter).
All capitalized terms used herein shall have the respective meanings ascribed
to such terms in the Note, unless otherwise defined herein.
Pursuant to condition (ii) set forth in the Transfer Letter, Prior
Lender requires, as one of the conditions to Sunrise Assisted Living, Inc.
("SALI") constituting a "Permitted Owner" under Section 1.23 of the mortgages
and deeds of trust securing the Loan, that Paul J. Klaassen and/or Teresa
Klaassen would retain ownership of at least 25% of the shares of common stock
of SALI outstanding from time to time, with the full unrestricted authority and
right to freely vote such shares, including without limitation, in connection
with the election of members of the Board of Directors of SALI (condition ii)
being referred to herein as the "Klaassen Ownership Condition"). You have
requested that Great Oak, L.L.C., a Delaware limited liability company ("Great
Oak"), which has succeeded, by assignment, to Prior Lender's interest in the
Loan and the Loan Documents, waive and release the Klaassen Ownership Condition
in order to permit Paul J. Klaassen and/or Teresa Klaassen to make certain
charitable contributions of the shares of common stock of SALI owned and held
by Paul J. Klaassen and/or Teresa Klaassen and to permit such stock to be used
in connection with certain employee stock option programs.
<PAGE> 2
Sunrise Assisted Living Limited Partnership
December 30, 1996
Page 2
Subject to all of the terms, conditions, and limitations set forth
herein, the Klaassen Ownership Condition shall not be a condition to SALI
constituting a "Permitted Owner" (as such term is defined in Section 1.23 of
the mortgages and deeds of trust securing the Loan) under Section 1.23 of the
mortgages and deeds of trust securing the Loan. Nothing herein shall release
any other condition set forth in the Transfer Letter and in the event that one
or more of the conditions, other than the Klaassen Ownership Condition, set
forth in the Transfer Letter are not satisfied at any time prior to the
repayment in full of the Loan and all amounts owed in connection therewith,
SALI shall not constitute a "Permitted Owner" and Great Oak reserves all rights
and remedies available to it under applicable law and pursuant to the documents
evidencing, securing and setting forth the terms of the Loan (the "Loan
Documents") as a result of a transfer to a person or entity which is not a
"Permitted Owner" in violation of Section 1.23 of the mortgages and deeds of
trust securing the Loan.
This letter and the agreements of Great Oak contained herein shall not
constitute (i) a waiver, release, amendment or modification of any of the terms
and provisions of the Loan Documents, including, without limitation, Section
1.23 of the mortgages and deeds of trust securing the Loan, or (ii) a course of
conduct, dealing or performance. By your execution below you agree that the
waiver granted hereby is a one-time, limited waiver and shall be narrowly
construed. We shall not be obligated to grant any further waivers with regard
to the same or related subject matters and no waiver shall be effective unless
in writing. By your execution below you agree to pay all of GECC's and Great
Oak's costs and expenses in connection with this letter, including, without
limitation, legal fees and expenses.
At our option this letter shall terminate and be of no further force
and effect unless this letter is executed by Borrower, the indemnitors (on the
acknowledgment attached hereto) and the guarantor (on the acknowledgment
attached hereto) and returned to us on or before December 31, 1996.
(REMAINDER OF PAGE INTENTIONALLY LEFT BLANK)
<PAGE> 3
Sunrise Assisted Living Limited Partnership
December 30, 1996
Page 3
Sincerely,
Great Oak, L.L.C., a Delaware limited liability
company
By: General Electric Capital Corporation,
a New York corporation, its manager
By: /s/ David B. Henry
-----------------------------------------
Name: David B. Henry
-----------------------------------------
Its: Vice President
-----------------------------------------
The terms and conditions of this letter
are accepted and agreed to:
SUNRISE ASSISTED LIVING LIMITED PARTNERSHIP,
a Virginia limited partnership
By: /s/ Paul J. Klaassen
------------------------------
Name: Paul J. Klaassen
------------------------------
Its: Chairman
------------------------------
Dated as of December 31, 1996
<PAGE> 4
Sunrise Assisted Living Limited Partnership
December 30, 1996
Page 4
Acknowledgment and Agreement by Indemnitors
Each of the undersigned, an indemnitor under the Indemnity Agreement
and Hazardous Substance Indemnity both dated June 8, 1994 and executed in
connection with the Loan referenced in the foregoing letter, joins in the
execution of the letter to acknowledge its terms and agrees that the terms and
conditions of the foregoing letter shall not modify, amend, affect or diminish
any of the obligations or liabilities of the indemnitors under the Indemnity
Agreement or under the Hazardous Substance Indemnity.
Dated as of December 31, 1996.
/s/ Paul J. Klaassen /s/ Teresa M. Klaassen
- -------------------------- ------------------------------
Paul J. Klaassen Teresa M. Klaassen
Acknowledgment and Agreement by Guarantor
The undersigned, guarantor under the Guaranty dated as of February 15,
1996 ("Second STI Guaranty") and executed in connection with the Loan
referenced in the foregoing letter, joins in the execution of the letter to
acknowledge its terms and agrees that the terms and conditions of the foregoing
letter shall not modify, amend, affect or diminish any of the obligations or
liabilities of the guarantor under the Second STI Guaranty.
Dated as of December 31, 1996.
Sunrise Terrace, Inc.
a Virginia corporation
By: /s/ Thomas B. Newell
------------------------------------------------
Name: Thomas B. Newell
------------------------------------------------
Its: Executive Vice President
------------------------------------------------
<PAGE> 1
EXHIBIT 10.12
THIRD LOAN MODIFICATION AGREEMENT
This THIRD LOAN MODIFICATION AGREEMENT ("Agreement") is made and
entered into as of this 4th day of March, 1997, by and between SUNRISE ASSISTED
LIVING LIMITED PARTNERSHIP, a Virginia limited ("Borrower") and GREAT OAK, LLC,
a Delaware Limited Liability Company ("Lenders").
RECITALS
A. Lender is the owner of the indebtedness (the "Loan") evidenced by
that certain Amended and Restated Promissory Note dated June 6, 1996, executed
by Borrower in favor of General Electric Capital Corporation ("GECC") in the
principal face amount of $87,000,000 (the "Amended Note")
B. The Loan is secured, in part, by mortgages and deeds of trust
executed by Borrower listed on Schedule 1 attached hereto (as heretofore
amended, modified and assigned, individually a "Mortgage" and collectively, the
"Mortgages"), encumbering the real property and improvements legally described
on Exhibit "A" attached hereto.
C. The Mortgages and the other documents and instruments executed from
time to time in connection with the Loan, as amended from time to time, are
collectively referred to herein as the "Loan Documents".
D. The Loan Documents were heretofore amended pursuant to the terms of
that certain First Loan Modification Agreement dated as of February 15, 1996
and that certain Second Loan Modification Agreement dated as of May l, 1996,
both executed by Borrower and GECC.
E. Borrower and Lender have agreed to modify certain terms and
provisions of the Amended Note.
NOW, THEREFORE in consideration of the foregoing, and other good and
valuable consideration, the receipt and sufficiency of which is hereby
acknowledged, the parties agree as follows:
AGREEMENT
1. The foregoing recitals are hereby incorporated by reference herein.
2. All initially capitalized terms not otherwise defined herein shall
have the respective meanings ascribed to them in the Amended Note.
3. Effective March 4, 1997, the term "Class B Contract Index Rate ",
as used in the Amended Note, shall mean, with respect to the Class B
Indebtedness, the rate of interest equal to one and three-quarters percent
(1.75%) per annum in excess of the Libor Rate;
<PAGE> 2
provided, however, that to and including March 3, 1997, the Class B Contract
index Rate shall be equal to three and three-quarters percent (3.75%) per annum
in excess of the Libor Rate.
4. From and after March 4, 1997 to and including March 3, 1999, the
Class B Indebtedness may not be prepaid, in whole or in part; provided,
however, that if at any time during the period March 4, 1998 to and including
March 3, 1999, the Libor Rate increases to more than 5.9375% (the "Increase"),
repayment of the whole or part of the Class B Indebtedness during the period
commencing thirty (30) days from the effective date of the Increase, to and
including sixty (60) days from the effective date of the Increase, shall be
permitted. From and after March 4, 1999, to and including the Maturity Date,
the provisions of the Amended Note, including without limitation, Section 6B.
thereof, shall govern prepayment of the Class B Indebtedness.
5. Nothing contained herein shall be in construed as in any manner
modifying that certain letter agreement dated December 30, 1996 executed by
Lender and Borrower, a copy of which is attached hereto as Exhibit B.
6. Except as modified herein, the terms and provisions of the Amended
Note remain unchanged and in full force and effect. In the event of any
conflict or inconsistencies between the terms of the Amended Note or any of the
other Loan Documents and the terms of this Agreement, the terms of this
Agreement shall govern and control. Except as expressly modified or replaced
pursuant to the terms of or as contemplated by this Agreement, the Loan
Documents are in full force and effect and are hereby ratified and confirmed by
Borrower and Lender.
7. This Agreement shall be binding upon and inure to the benefit of
Lender and Borrower, and their respective heirs, legal representatives,
successors and assigns subject to all limitations set forth in the Loan
Documents. This Agreement is not intended to benefit any party other than the
Borrower, the Lender, and the successors and assigns of the Lender and is
specifically not intended to be for the benefit of any party other than those
which are a party to this Agreement.
8. This Agreement may be executed in two or more counterparts, each of
which may be executed by one or more of the parties hereto, but all of which,
when taken together, shall constitute but one agreement.
9. The validity, meaning and effect of this Agreement shall be
determined in accordance with the laws of the Commonwealth of Virginia
applicable to contracts made to be performed in that State without regard to
principles of conflicts of law.
10. Borrower's (and its partners') liability hereunder is limited as
set forth in Section 17 of the Amended Note and Section 17 of the Amended Note
is hereby incorporated by reference as if fully set forth herein.
<PAGE> 3
IN WITNESS WHERE OF, the parties hereto have executed this document
as of the day and year first above written
Borrower:
SUNRISE ASSISTED LIVING LIMITED
PARTNERSHIP, a Virginia limited partnership
By: Sunrise Assisted Living Investments, Inc.
A Virginia corporation its general partner
By: /s/ David W. Faeder
------------------------------------
David W. Faeder,
Executive Vice-President
By: /s/ Thomas B. Newell
------------------------------------
Thomas B. Newell,
Executive Vice-President
Lender
GREAT OAK LLC, a Delaware limited
liability company
By: GE Capital Realty Group, Inc., a
Texas corporation, its
attorney-in-fact
By: /s/ Joseph E. Jernigan
------------------------------------
Its: Vice President
------------------------------------
Prepared by and after recording return to:
James B. Fadim, Esq.
Sonnenschein Nath & Rosenthal
8000 Sears Tower
Chicago, Illinois 60606-6404
(312) 876-7971
<PAGE> 4
COMMONWEALTH OF VIRGINIA )
) SS:
COUNTY OF FAIRFAX )
Before me, a Notary Public, in and for said County, in the Commonwealth
aforesaid, personally appeared David W. Faeder and Thomas B. Newell , the
Executive Vice-Presidents of SUNRISE ASSISTED LIVING INVESTMENTS, INC., a
Virginia corporation, the general partner of SUNRISE ASSISTED LIVING LIMITED
PARTNERSHIP, a Virginia limited partnership, and acknowledge the execution of
the foregoing instrument on behalf of the corporation, as such general partner.
WITNESS my hand and Notarial Seal this 4 day of March, 1997
/s/ Mellissa A. Haynes
-----------------------------------
Signature
Mellissa A. Haynes
-----------------------------------
Printed Name
My Commission Expires.:
- ----------------------------
March 31, 2000
STATE OF TEXAS )
) SS.
COUNTY OF DALLAS )
I, the undersigned, a Notary Public, in and for said County and State,
DO HEREBY CERTIFY, that Joseph D Jernigan, personally known to me to be Vice
President of GE CAPITAL REALTY GROUP, INC., a Texas corporation, acting as
attorney-in-fact for GREAT OAK, TLC, a Delaware limited liability company,
appeared before me this day in person and acknowledged that he signed and
delivered the said instrument as the free and voluntary act of corporation, as
said attorney-in-fact, for the uses and purposes therein set forth.
GIVEN under my hand and Notarial Seal this 4 day of March, 1997.
-----------------------------------
Signature
/s/ Tonya J. Havland
-----------------------------------
Printed Name Tonya J. Havland
My Commission Expires:
October 14, 1998
- ----------------------------
<PAGE> 5
CONSENT OF SUNRISE TERRACE, INC.
TO THIRD LOAN MODIFICATION AGREEMENT
Capitalized terms used herein without definition shall have the
respective meanings ascribed thereto in the Amended and Restated Note dated June
6, 1996, executive by Sunrise Assisted Living limited Partnership in favor of
General Electric Capital Corporation.
The undersigned, as Guarantor pursuant to the Guaranty, hereby
consents and agrees to all of the terms and conditions of the above and
foregoing Third Loan Modification agreement dated as of March 4, 1997, and
hereby remakes all of the covenants made and reaffirms all of the obligations to
be performed by the undersigned as Guarantor under the Guaranty. The undersigned
acknowledges and reaffirms that it remains liable under the Guaranty and that
the Guaranty is in full force and effect.
DATED: As of March 4, 1997
SUNRISE TERRACE, INC. a Virginia corporation
By: /s/ David W. Faeder
-----------------------------------------
David W. Faeder, Executive Vice-President
By: /s/ Thomas B. Newell
-----------------------------------------
Thomas B. Newell, Executive Vice-President
<PAGE> 6
COMMONWEALTH OF VIRGINIA )
) SS:
COUNTY OF FAIRFAX )
I, the undersigned, a Notary Public, in and for said County, in the
Commonwealth aforesaid, DO HEREBY CERTIFY, that David W. Faeder and Thomas B.
Newell, personally known to me to be the Executive Vice-Presidents of Sunrise
Terrace, inc., a Virginia corporation appeared before me this day in person and
acknowledged that he signed and delivered the said instrument as the free and
voluntary act of said corporation, for the uses and purposes therein set forth.
GIVEN under my hand and Notarial Seal, this 4 day of March, 1997.
/s/ Mellissa A. Haynes
-----------------------------------
Signature
Mellissa A. Haynes
-----------------------------------
Printed Name
My Commission Expires:
March 31, 2000
- ----------------------------
<PAGE> 7
CONSENT OF INDEMNITORS
Capitalized terms used herein without definition shall have the
respective meanings ascribed there to in the Amended and Restated Note dated
June 6, 1996, executed by Sunrise Assisted Living Limited Partnership in favor
of General Electric Capital Corporation.
Each of the undersigned, an indemnitor under the Indemnity Agreement
and Hazardous Substance Indemnity both dated June 8, 1994 and executed in
connection with the Loan, hereby acknowledges and consents to the execution of
the above and foregoing Third Loan Modification Agreement dated as of March 4,
1997, and agrees that the terms and conditions thereof shall not modify, amend,
affect, or diminish any of the obligations or liabilities of the indemnitors
under the Indemnity Agreement or under the Hazardous Substance Indemnity
Agreement.
DATED: As of March 4, 1997
/s/ Paul J. Klaassen /s/ Teresa M. Klaassen
- --------------------------- ---------------------------
Paul J. Klaassen Teresa M. Klaassen
COMMONWEALTH OF VIRGINIA )
) SS.
COUNTY OF FAIRFAX )
Before me, a Notary Public, in and for said County and in the
Commonwealth aforesaid, personally appeared Paul J. Klaassen and Teresa
Klaassen, and acknowledged their execution of the foregoing instrument.
WITNESS my hand and Notarial Seal this 3 day of March, 1997.
/s/ Mellissa A. Haynes
---------------------------
Signature
Mellissa A. Haynes
---------------------------
Printed Name
My Commission Expires:
March 31, 2000
- ----------------------------
<PAGE> 1
EXHIBIT 13
1996 Annual Report
SUNRISE ASSISTED LIVING, INC.
LEADING A REVOLUTION
IN LONG-TERM CARE
[SUNRISE LOGO]
[PHOTO of Exterior of a Sunrise Model Facility]
<PAGE> 2
ABOUT OUR COVER:
Fifteen years ago, there were few long-term care options open to seniors in
America who could no longer live on their own but did not need skilled nursing
care. Since then, the assisted living industry has emerged, offering thousands
of seniors a new choice--the opportunity to receive the help they need with
daily activities while living in a homelike, residential environment. Founded
in 1981, Sunrise Assisted Living has been at the forefront of this emerging
industry that is changing the face of long-term care in America.
[PHOTO of Exterior of a Sunrise Model Facility]
FINANCIAL AND OPERATING HIGHLIGHTS
(in thousands)
<TABLE>
<CAPTION>
Years Ended December 31 1996 1995 1994 1993 1992
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA(1)
Operating revenue $ 47,345 $ 37,258 $ 33,969 $25,598 $16,879
Net (loss) income(2) (3) (4,760) (10,137) 1,412 (637) (171)
EBITDA(4) 5,713 8,199 11,745 5,653 3,046
BALANCE SHEET DATA(1)
Cash and cash equivalents 101,811 6,253 8,089 3,268 2,499
Total assets 342,839 123,321 109,003 61,159 50,866
Total debt 144,544 122,289 110,029 55,207 45,405
Stockholders' equity (deficit) 185,824 (31,774) (16,391) (2,925) (1,716)
OPERATING AND OTHER DATA
Facilities (at end of period):
Owned(5) 30 20 19 16 14
Managed 5 8 9 7 5
Total 35 28 28 23 19
Occupancy rate(6) 94.1% 91.7% 94.8% 94.0% --
</TABLE>
Notes (1) - (6): See notes to Selected Financial and Operating Data on page 18.
OPERATING REVENUES
(in millions)
<TABLE>
<CAPTION>
'92 '93 '94 '95 '96
-- -- -- -- --
<S> <C> <C> <C> <C> <C>
16.9 25.6 34.0 37.3 47.3
</TABLE>
RESIDENT CAPACITY
OF OWNED AND
MANAGED FACILITIES
(in thousands)
<TABLE>
<CAPTION>
'92 '93 '94 '95 '96 '97
-- -- -- -- -- --
<S> <C> <C> <C> <C> <C> <C>
1.6 1.9 2.2 2.3 3.1 5.0*
</TABLE>
* Resident capacity for 1997 includes the additional capacity of facilities
currently under construction and expected to open in 1997.
Note: All references to Sunrise Assisted Living or the Company refer to Sunrise
Assisted Living, Inc. and its predecessors and subsidiaries.
<PAGE> 3
NEW WAYS TO SERVE THE GROWING SENIOR CARE MARKET
[PHOTO of Exterior of a Sunrise Model Facility]
QUALITY CARE WITH A HEART FOR SERVICE
[PHOTO of Family Member with Model]
2 LETTER TO SHAREHOLDERS
Chairman, President and CEO Paul Klaassen outlines 1996 achievements and
the Company's strategy for disciplined growth.
6 FIFTEEN YEARS OF GROWTH AND INNOVATION
One of the leading and largest providers in the assisted living industry,
Sunrise has been at the forefront of advocating and implementing new
approaches to senior care.
8 LEADING A GROWING INDUSTRY
Five key factors are contributing to the rapid growth of the assisted
living industry.
10 A GROUNDBREAKING DESIGN
The Company's Victorian-style model facility has been fine-tuned and
time-tested to better serve the needs of assisted living residents.
12 A DEDICATION TO SERVICE
The Sunrise approach to assisted living hinges on a respect for the
diverse needs of seniors.
14 TAKING A FRESH APPROACH
Sunrise has developed innovative programs for residents with Alzheimer's
disease and related memory impairments.
16 POSITIONED FOR GROWTH
The Company has an experienced, committed management team that is focused
on making assisted living by Sunrise available to thousands more seniors
across the country.
CORPORATE PROFILE
Sunrise Assisted Living, Inc. is one of the nation's leading providers of
assisted living care for seniors. Founded in 1981, the Company is one of the
oldest and largest in the industry, with 37 communities in 11 states and 22
more under construction as of March 17, 1997. The Sunrise Principles of Service
focus on providing seniors with high quality, personalized care in a homelike,
residential environment that encourages independence, protects privacy and
fosters individuality.
1
<PAGE> 4
[PHOTO]
Paul J. Klaassen
Chairman, President and
Chief Executive Officer
TO OUR SHAREHOLDERS, CUSTOMERS
AND EMPLOYEES:
BY ANY MEASURE, THIS IS AN EXTRAORDINARY TIME FOR SUNRISE. Allow me to take
just a moment to set the stage for you. When we opened the doors of the first
Sunrise in Fairfax County, Virginia in 1981, our dream was to offer frail
seniors who could no longer live on their own an alternative to traditional
nursing home care. We knew many seniors didn't need the intensive medical care
provided by nursing homes, but they wound up there anyway because there was
nowhere else for them to go. We set out to offer these seniors another
choice--one that would provide them with loving, personalized care in an
attractive, homelike environment, and one that would encourage them to be as
active and independent as they possibly could be.
Fifteen years have passed since then, and an entire industry dedicated to
this new approach is transforming long-term care in America. Sunrise has been
at the forefront of this industry and has grown into a strong, dynamic company,
filled with thousands of dedicated, professional caregivers and led by a team
of skilled, experienced managers who have a vision and a plan for making
assisted living by Sunrise available to thousands more seniors and their
families throughout the country.
It is a privilege and a pleasure to take the pulse of this dynamic,
fast-growing company and report to you the highlights of what has been a very
successful year.
1996 RESULTS
We are very pleased with our 1996 financial performance. Our revenues for the
year were up $10 million over 1995, and our fourth quarter revenues grew 56
percent over 1995 fourth quarter revenues. Our operating loss of $4.8 million
was in line with our expectations and reflects the substantial investments we
made during the year to build our corporate infrastructure. We continued to
make these investments in people and systems during 1996 to support the
completions and openings of a substantial number of new Sunrise communities in
1997 and 1998.
2
<PAGE> 5
Our net loss also includes $4 million of depreciation and amortization
expense because we own the majority of our assets. We believe this asset
ownership strategy will provide the best long-term value for our shareholders.
Our fourth quarter loss of $182,000 was a significant improvement over our 1995
fourth quarter loss of $7.8 million and moves us closer to profitability on an
earnings per share basis. I should mention, too, that we reported positive cash
flow from operations for the third consecutive year.
FINANCE
In finance last year, we also significantly enhanced Sunrise's balance sheet.
On the equity side, we completed two successful public offerings, raising gross
proceeds of $211.3 million. These offerings gave us the capital base to
continue to execute our recently expanded growth plans, which include the
aforementioned ownership of our own assets. We also maintain enough liquidity
to be highly selective in looking at development and acquisition opportunities.
On the debt side, from Jan. 1, 1996 through March 17, 1997 we received
commitments for a total of $190 million from 12 lending institutions, including
a $90 million commitment from our sector's first bank syndicate group, which
was led by NationsBank. We believe we now have one of the best balance sheets
and one of the lowest costs of capital in the assisted living sector.
DEVELOPMENT
In development, we have made significant progress in implementing our major
metropolitan market strategy by expanding into four new states, opening five
new model communities, beginning construction on 22 more and identifying many
additional sites. Sunrise now has a presence in most of the top metropolitan
markets in the country.
We believe that to be successful in assisted living in the long run, a
company must have three things:the best physical model, the best locations, and
most importantly, excellent care through great execution. All three are
critical for long-term success, and I am proud and confident to say that
Sunrise scores high in each category. Our model, now in its eighth generation,
is the most tested and refined in the industry, and our architecture and design
team continues to improve it with each new community we build. We've
successfully secured top locations in some of the best demographic zip codes in
the U.S., and we believe our track record in operations is deeper and more
experienced than that of any other provider in the country.
HIGHLIGHTS
- - Completed two successful public offerings, raising gross proceeds of
$211.3 million.
- - Achieved a market capitalization of $516.5 million by year-end.
- - Received commitments for $190 million from 12 lending institutions.
- - Opened five new communities and began construction on 22 more in major
metropolitan markets.
- - Acquired seven new assisted and independent living properties.
- - Increased resident capacity of Sunrise-operated facilities to more than
3,300.
- - Made further investments in the Company's infrastructure, adding several
experienced senior managers and expanding our employee base to nearly
2,400 to support our aggressive yet disciplined growth plans.
3
<PAGE> 6
We're proud of the special role we've played in the emergence of this new
industry--helping to define the field, introducing cutting-edge new building
models and operational systems, and setting financial benchmarks.
ACQUISITIONS
On the acquisitions side, we are continuing to selectively purchase strategic
senior living assets across the country on which we're proud to put the Sunrise
name. During 1996, we acquired six assisted and independent living communities.
In 1997 so far, we have acquired one additional property and signed a contract
to purchase one more.
OPERATIONS
In operations, we have been rewarded with very high occupancy levels in our
existing homes and rapid fill-up in our new communities. We've also enhanced
Sunrise quality assurance programs and recruitment and training efforts to
ensure our residents consistent, high quality care that is delivered by caring,
dedicated professionals.
Undergirding the progress I've just outlined is Sunrise's belief in the
sacred value of each human life. Out of this belief have come our fundamental
Principles of Service--principles such as encouraging independence, preserving
dignity and fostering individuality, which have become defining hallmarks of
the assisted living industry. Our approach to caregiving has evolved from and
is guided by these principles.
Sunrise team members share two other values:a belief in the joy of service
and a sense of mission or calling to this work. Consistently delivering warm,
loving, safe and high-quality
[PHOTO of Exterior of a Sunrise Model Facility]
4
<PAGE> 7
environments and quality care to frail human beings is special work. Sunrise
team members recognize this special responsibility, and we look for others to
join us who share this sense of calling. We also believe that true happiness
comes from service. This is no old-fashioned homily at Sunrise. It is a
fundamental, core value we look for in anyone who joins the Company. I want to
personally thank all Sunrise employees for honoring these values in your daily
work and for the tremendous effort you put forth in 1996 to carry on and expand
our Company traditions.
OUR VALUES
We're proud of the special role we've played in the emergence of this new
industry--helping to define the field, introducing cutting-edge new building
models and operational systems, and setting financial benchmarks. We're also
pleased with the accomplishments I've just outlined --an aggressive yet
disciplined growth plan that is on or ahead of schedule, continued investments
in people and infrastructure to support that growth, and balance-sheet
strength. We are not, however, content. In this emerging industry, we know that
the best assisted living care has yet to be invented. And that motivates us to
continually seek ways to improve our care and thereby maintain our tradition of
leadership and standard-setting in the industry. On this foundation of
time-tested leadership and experience, we approach the future with confidence
and excitement.
On behalf of the entire Sunrise team, I want to express our appreciation
to you--our shareholders, residents and families--who have placed your trust in
us. We look forward to serving you in the years ahead.
Sincerely,
/s/ PAUL J. KLAASSAN
- ---------------------------------
Paul J. Klaassen
Chairman, President and Chief Executive Officer
March 17, 1997
[PHOTO of Exterior of a Sunrise Model Facility]
We completed two successful public offerings, raising gross proceeds of $211.3
million, and received commitments for $190 million from 12 lending
institutions, giving us a capital base of $401.3 million to execute our
recently expanded growth plans.
5
<PAGE> 8
[PHOTO of Sunrise Care Manager with Resident]
[PHOTO of Exterior of a Sunrise Model Facility]
[PHOTO of Resident]
[PHOTO of Sunrise Care Manager Assisting Resident with Eating]
[PHOTO]
Sunrise Executive Vice President Terry Klaassen visits with Sunrise of
Annapolis resident Arthur Janushek. In 1981, Terry and Paul Klaassen opened and
personally provided live-in care at the first Sunrise community in Fairfax
County, Va.
6
<PAGE> 9
15 YEARS OF GROWTH AND INNOVATION
In 15 years, Sunrise Assisted Living has grown from a single residence in
Northern Virginia to a network of 37 owned and managed facilities in 11 states,
as of March 17, 1997. With 22 new assisted living facilities under construction
and many more in earlier stages of development, Sunrise expects to operate more
than 90 communities by year-end 1999. Today, the Company is one of the largest
and most experienced in the growing assisted living industry.
Assisted living offers personalized care and supportive services in a
homelike, residential environment for seniors who need some assistance with
activities of daily living but who do not have complex medical needs that
require skilled nursing care. The industry evolved out of a consumer desire for
an alternative to traditional long-term care options such as nursing homes and
home health care. Sunrise offers seniors a range of services, from assistance
with basic activities of daily living--such as help with bathing, eating and
dressing--to medication management and Alzheimer's care.
COMPANY HISTORY
Fifteen years ago, Sunrise founders Paul and Terry Klaassen were among the
first to recognize the need for a new approach to long-term care. Seeing a gap
in the market for high-quality, residential-style senior care facilities, they
opened their first Sunrise Assisted Living community in Fairfax County, Va. in
1981 by renovating a former nursing home. Caring for residents and training the
staff themselves, the Klaassens developed a new approach to delivering
high-quality, personalized care that has set industry standards. By 1985, the
Company had renovated and opened two more communities in Warrenton and
Leesburg, Va.
As the Sunrise operating philosophy evolved, it became clear that the new
approach to long-term care could be better executed if a new building was
designed to specifically support assisted living care. As a result, based on
seven years of operating experience, in 1988 Sunrise opened its first model
community, a 60-resident community in Arlington, Va. especially designed for
assisted living. Based on a Victorian-style manor home, that model has won
numerous awards, and the design has been refined each year since then to
reflect Sunrise's growing understanding of how to better serve seniors and
their families.
DEVELOPMENT AND ACQUISITIONS
Recognized as a premier, full-service provider, the Company is now developing
clusters of communities in major metropolitan areas and surrounding suburban
markets throughout the country. In some cases, Sunrise has initially expanded
into new markets through acquisitions. For example, in 1996 Sunrise acquired
six assisted and independent living communities in California, Florida, Georgia
and South Carolina. And, in February 1997, the Company completed the
acquisition of a property in Valencia, Calif., and the first of a planned
three-property acquisition from the California-based WindChime Group, LTD. by
acquiring a property currently under construction in Walnut Creek, Calif., an
area east of San Francisco Bay. These acquisitions will give Sunrise an
immediate presence with high-quality communities in several major markets the
Company has targeted for development.
[PHOTO]
"My mother-in-law loves it at Sunrise. There's always something for her to do:
she plays cards, does crafts and enjoys her friends. That means we can go to
bed at night feeling at ease with her care and not the least bit guilty about
her being there. We're very, very happy with Sunrise and have recommended it to
others."
- -- Linda Stevens, R.N.
7
<PAGE> 10
[PHOTO of Interior of Sunrise Model Facility]
"Not only is assisted living far more palatable than life in a nursing
home--the facilities are residential rather than institutional--but it's also
cheaper, crucial in the era of managed care."
"Promising Industries for 1997," FORTUNE, December 23, 1996
[PHOTO of Interior of Sunrise Model Facility]
[PHOTO of Interior of Sunrise Model Facility]
[PHOTO of Interior of Sunrise Model Facility]
[PHOTO of Two Residents and Two Models]
"With the number of Americans age 85 and older projected to increase from 3.7
million last year to 6 million in 2010, the assisted-living concept is hot.
Last year the industry generated $12 billion in revenues; it's expected to grow
by almost 20% a year for the next three to five years."
"Up & Comers: Sunrise Assisted Living,"
FORBES, February 24, 1997
8
<PAGE> 11
LEADING A GROWING INDUSTRY
The assisted living industry has enjoyed dramatic growth in the last decade.
Introduced in the U.S. in the early 1980s, it has become a $12 billion industry
and is growing at an estimated 15 to 20 percent per year. Already one of the
fastest growing segments of the overall health care delivery system, analysts
predict the assisted living industry will grow to $20 billion by the year 2000
and reach $75 billion by the year 2005. A number of factors are driving this
growth. They include:
CONSUMER PREFERENCE. Many seniors who are unable to live at home but who do not
have complex medical needs prefer the homelike environment and individualized
care of assisted living to the often restrictive and institutional settings of
traditional nursing homes. With its new approach to care and environments,
assisted living is filling an important niche in the long-term care market.
GROWTH OF THE AGING POPULATION. The 85-plus age group--the primary market for
assisted living--is projected to be the fastest growing population segment
between 1990 and 2020. It is expected to more than double from 3.1 to 7 million
people by 2020 and to increase to 18.9 million by 2050 when the baby boomers
reach their 80s. Because functional limitations increase with age, an estimated
30 to 60 percent of people over 85 need some form of assistance with basic
daily activities such as eating, bathing, dressing and walking--needs that can
often be met by assisted living.
COST ADVANTAGES. Assisted living generally costs less than skilled nursing and
home health care. And while many nursing homes rely on Medicaid and Medicare
reimbursements, more than 95 percent of services in publicly-traded assisted
living companies are reimbursed through private pay. Over time, given
cost-containment pressures within the health care industry, affordability
should play an increasing role in a shift toward assisted living.
A SHIFT IN DEMAND. While the senior population is growing, the supply of
skilled nursing home beds per 1,000 persons 85 and older is declining. Nursing
homes are increasingly focused on higher acuity patients with higher
reimbursement profiles, creating a need for assisted living for those who do
not have complex medical needs. Many lower-acuity nursing home residents are
also shifting to assisted living because of its affordability and the higher
degree of freedom and independence it offers. In fact, recent studies by the
U.S. Department of Health and Human Services found that between 25 and 40
percent of nursing home residents could be more appropriately cared for in less
costly and less institutional environments such as assisted living.
CHANGING FAMILY DYNAMICS. Due to several socioeconomic trends, many adult
children are no longer able to care for elderly parents in their own homes.
These trends include the increased participation of women in the work force,
the geographic dispersion of families throughout the country, and rising
divorce rates. Assisted living buyers or decision-makers are typically children
in the 45 to 64 age range who are looking for care for their elderly parents.
Interestingly, a recent study by the American Association of Retired Persons
(AARP)revealed that 80 percent of the seniors surveyed, if given a choice,
would prefer not to live with their children.
[PHOTO]
"I had a stroke in 1995 and my doctor said I could no longer live at home
without 24-hour care. My three children have families and responsibilities of
their own and couldn't do it, so we decided on Sunrise of Annapolis. I love it
here because it has a homey, warm feeling and lots of natural light, and the
care managers are wonderful. I'm a widow, and Sunrise gives me the security of
24-hour emergency watch in case I get sick. The company is wonderful, my
neighbors are great, and there's a real sense of community here."
- -- Lela Vieser
[PHOTO]
"My mother's care at Sunrise has been of such quality that our family has been
continually reassured of her well being. Sunrise, in our view, is seldom
equaled and never surpassed in assisted living."
- -- James C. Pfautz
Major General, USAF (Ret.)
9
<PAGE> 12
[PHOTO of Sunrise Model Facility Under Construction]
[PHOTO of Sunrise Model Facility Under Construction]
[PHOTO of Interior of Sunrise Model Facility]
[PHOTO of Construction Worker at Sunrise Model Facility Under Construction]
The grand staircase at the center of every Sunrise model facility is symbolic
of the architecture and lifestyle of an elegant Victorian manor home.
[PHOTO]
[PHOTO of Interior of Sunrise Model Facility]
[PHOTO of Interior of Sunrise Model Facility]
[PHOTO of Sunrise Model Facility Under Construction]
- - 37 communities currently operated
- - 22 under construction
- - 23 sites under contract
As of March 17, 1997
10
<PAGE> 13
A GROUNDBREAKING DESIGN
The success of assisted living rests, in large measure, with the fact that it
offers a comfortable, residential-style environment, in contrast to the
institutional settings traditionally associated senior care. The distinction at
Sunrise Assisted Living is dramatic down to the smallest detail. Each Sunrise
model facility has the look and feel of a well-appointed, Victorian manor home.
Large, low windows, incandescent and non-fluorescent lighting, and carpeting
are found throughout. Hallways are rare, with rooms instead often opening up to
other rooms. Where hallways do exist, they are short and wide, resembling those
in a private home.
Because, over the course of a lifetime, people generally prefer to "trade
up" each time they move to a new home, a special effort is made at Sunrise to
ensure that what may well be a resident's last home is particularly elegant and
that much finer than the home they left behind. That effort extends to the
smallest detail--lush, richly colored upholstery, fresh cut flowers and linen
table cloths are standard fare at every Sunrise community. Even the hand rails
along the walls, necessary in a residence for seniors, are disguised as
decorative chair rails.
Every aspect of Sunrise's model design serves the central purpose of
creating a warm, comfortable environment--a place where residents and their
families can feel at home. Each community is kept small, accommodating 70 to
110 residents, and interior rooms are sized to residential scale. Sunrise's
unique design provides residents with a community-within-a-community: A series
of "neighborhoods" consisting of clusters of private resident rooms surround a
central parlor which leads, in turn, to common areas for dining and
socializing.
SUNRISE INTERIORS
Convinced that environment has an enormous impact on people's health and
well-being, Sunrise interiors are elegantly furnished and accessorized by
Martha Child Interiors, a design firm owned by Sunrise, to create a sense of
warmth, comfort and stimulation. Resident neighborhoods are decorated in themes
for increased interest and to help residents locate their suites. Walls are
covered with art work, clocks and decorative plates, and common areas feature
flowers, candlesticks and figurines throughout.
The first residence built according to Sunrise's model design, a
60-resident home in Arlington, Virginia, opened in 1988. Since then, the design
has been fine-tuned and time-tested, to better serve the needs of assisted
living residents and their families. For example, when experience revealed that
family and friends prefer to visit with residents in public areas rather than
always gathering in a resident's private room, Sunrise increased common area
space in each residence to approximately 40 percent of the total space to make
frequent visits by family and friends more comfortable and enjoyable.
The building design is integral to the successful implementation of the
Sunrise operating philosophy that promotes the independence, privacy and
well-being of residents and their families. Standard design elements include
sun porches, gardens and walking paths; a small, private dining room where
residents can entertain family and guests; and a bistro/ice cream parlor/cafe
that is always open for snacks and entertaining guests. All of these elements
work together to support the needs of Sunrise residents and their families.
[PHOTO]
"Sunrise environments are highly residential in character and achieve a natural
balance between beauty and utility."
- -- Victor Regnier, FAIA Professor, School of Architecture Andrus Gerontology
Center University of Southern California, and Sunrise Consulting
Architect
11
<PAGE> 14
PRINCIPLES OF SERVICE
Sunrise pledges to serve with kindness, love and professionalism, while
demonstrating a commitment to the following principles:
PRESERVING DIGNITY
Each resident is esteemed as a unique individual whose life and experiences are
valued and respected.
ENCOURAGING INDEPENDENCE
Residents have a right to be as independent as they possibly can be. Through a
combination of services and assistance, Sunrise whenever possible encourages
each resident's self-reliance.
ENABLING FREEDOM OF CHOICE
Residents make their own choices and create their own schedules. Each one
decides what to do and when to do it. After all, it's their life--and it's
their home.
PERSONALIZING SERVICES
Personal, one-on-one attention in a caring, home-like setting can help seniors
maintain a sense of dignity, purpose and self-esteem.
PROTECTING PRIVACY
While assisting residents with personal needs such as bathing, dressing and
toileting, Sunrise is committed to protecting each resident's privacy and
dignity.
FOSTERING INDIVIDUALITY
Quality care and assistance include recognizing the interests, abilities and
routines of each individual resident. Programs, activities and daily care are
flexible with residents' personal needs and preferences.
NURTURING THE SPIRIT
From wellness care and assistance with activities of daily living, to a full
calendar of activities and the social interaction that makes life meaningful
and enjoyable, Sunrise cares for the whole person--mind, body and spirit.
INVOLVING FAMILY AND FRIENDS
Sunrise is not like traditional long-term care facilities with set visiting
hours. Residents' friends and family are always welcome, and their involvement
is wholeheartedly encouraged.
[PHOTO]
[PHOTO]
[PHOTO]
Assisted living strikes a balance between independence and care, offering
residents the assistance they need while still assuring them privacy, dignity
and freedom of choice. Sunrise residents are encouraged to get up and dressed
every morning. They have the option of spending the day as they choose, taking
advantage of a variety of activities, including exercise and wellness programs
and up to six different planned social and recreational opportunities each day.
12
<PAGE> 15
A DEDICATION TO SERVICE
Sunrise offers a full range of assisted living services, from basic care
through Alzheimer's care, enabling many residents to "age in place" as their
needs change. Most Sunrise residents need assistance with some activities of
daily living, such as eating, bathing and dressing, as well as support with
transportation, coordination with physicians, housekeeping and other services.
Sunrise also offers medication management, incontinence products and services
programs, and a special program for residents with Alzheimer's disease and
other forms of memory impairment. These programs are tailored to the individual
needs of each resident, monitored over time and adjusted as needed, to provide
personalized care to each individual resident.
In this range of assisted living services, Sunrise is dedicated to serving
residents with high-quality, compassionate care that is consistent with its
Principles of Service that appear on the facing page. These principles are the
foundation of the Company's operating philosophy and are at the core of every
aspect of Sunrise's operations--from building design and development through
program development and staff training.
SUNRISE FIVE-STAR TRAINING PROGRAM
For 15 years, Sunrise has played a leadership role in setting industry
standards by developing innovative programs and creating special Sunrise
Signatures that distinguish the Company from other assisted living providers.
One such program is the Company's unique Five-Star Training Program that it
developed to help caregivers increase their knowledge and sharpen their skills.
Understanding that the key to delivering high-quality, personalized care is a
well-trained staff of dedicated, compassionate caregivers, Sunrise has
continually refined this five-level training program to ensure that it enables
team members not only to achieve competency in various areas, but to understand
how to implement the Company's Principles of Service in their day-to-day work
in Sunrise communities.
Another Sunrise program that is unique to the industry is its caressable
pets program, designed to enhance the emotional well-being of residents.
Because pets can bring joy and offer comfort and unconditional love to
residents, every Sunrise home has a dog or cat living on the premises.
A number of Sunrise communities also have intergenerational programs that
serve the educational needs of children while providing love, attention and
stimulation for seniors. For example, at Sunrise of Gunston, Va., seniors with
educational backgrounds tutor first-graders in reading and phonics at the local
school. And at Sunrise of Fairfax, Va., students from the Talent Houseschool
next door join seniors regularly for activities ranging from baking and singing
to reading and arts and crafts.
SUNRISE SIGNATURES
Recognizing that extra little touches can make a world of difference in quality
of life, Sunrise has further differentiated itself from other assisted living
providers through its Sunrise Signatures--unique services, programs and
features that are found in every Sunrise community. For example, once a week,
fresh bread is baked in the kitchen of every Sunrise residence, and freshly cut
flowers are on display every day in the foyers, dining rooms and public
restrooms of every Sunrise home. In the common areas, a box of children's toys
is always available for visiting families, and a photo album displaying
resident activities is always on hand. These and other Sunrise Signatures are
part of the ongoing process of creating a strong sense of place where Sunrise
residents and their families feel comfortable and at home.
[PHOTO]
"Being a caregiver means helping others, caring for them and taking after them
the way you would if they were your own family and living in your own home."
- -- Nina Brown
Sunrise care manager
[PHOTO]
"Our residents need assistance from people whose focus is not `how can I get
through this day,' but rather, `how can I help this resident have a great
day.'"
- -- Cindy Eller
Sunrise team member
13
<PAGE> 16
"...Sunrise homes are furnished with `life skills stations,' such as a nursery
and office, and staff members frequently pull out `reminiscence kits' for the
residents to enjoy....`It's a more positive approach to taking care of somebody
with Alzheimer's,' [Sunrise employee Melanie] McKibbin said. `We incorporate a
lot of what they remember into their lives, and this brings about a sense of
comfort, security and recognition. It helps to alleviate the fear of the
unknown and gives them something to hold onto that they're comfortable with.' "
- -- "Calming the Confusion
of Alzheimer's,"
THE WASHINGTON POST,
Feb. 20, 1997
[PHOTO of Residents]
[PHOTO of Residents]
[PHOTO of Interior of Sunrise Model Facility]
[PHOTO of Interior of Sunrise Model Facility]
[PHOTO of Resident with Child]
[PHOTO of Resident with Dog]
[PHOTO of Resident]
14
<PAGE> 17
TAKING A FRESH APPROACH
According to the Alzheimer's Association, four million Americans have
Alzheimer's, a progressive, degenerative disease that affects cognitive
function. Half the population over age 85 reportedly has the disease and, by
2050, Alzheimer's disease is expected to affect 14 million people. Its symptoms
include confusion and loss of short-term memory, making it increasingly
difficult for people to care for themselves.
To meet the needs of residents with Alzheimer's disease and related memory
impairments, Sunrise has developed an innovative program that incorporates best
practices in Alzheimer's care from around the world. Called the Sunrise
Reminiscence Program, the program was developed in accordance with the
Alzheimer's Association's Guidelines for Dignity and incorporates elements that
help stimulate the memories and senses of residents with Alzheimer's disease.
REMINISCENCE LIFE SKILLS CENTERS
The Sunrise Reminiscence Program uses special Life Skills centers and kits to
help residents with memory impairments tap into their memories and find
pleasure in reenacting moments from their past. The content of the centers and
kits varies depending on the personal histories and interests of the residents
in each particular Reminiscence Neighborhood, but faux nurseries and offices
(see photos, left), along with sewingboxes, tool kits and wedding memorabilia,
are often used to help residents find joy and comfort in remembering important
moments and activities from their pasts. Other program elements help residents
connect with the world around them through music and multi-sensory experiences,
including textural art that encourages touching--an important source of
stimulation for seniors with Alzheimer's disease.
REMINISCENCE NEIGHBORHOOD DESIGN
Many Sunrise communities feature dedicated, secure areas that are specially
designed for residents with Alzheimer's disease and related memory impairments.
Called Reminiscence Neighborhoods, these areas include circular wandering paths
throughout that allow residents to more easily find their way back to their
suites. Reminiscence Neighborhood kitchens feature specially-designed low
counters that are used for therapeutic activities such as flower arranging and
group games, as well as everyday dining purposes. Alzheimer's team member
offices are designed with windows and Dutch doors to enable team members to
remain in contact with residents even while they work on care plans or visit
with family members.
Caring for residents with Alzheimer's disease requires special skills, an
understanding of the nature of this degenerative illness, and a patient and
loving disposition. Sunrise Alzheimer's caregivers receive training to help
them better communicate and build strong relationships with residents. It is
not unusual to find a Sunrise team member in a Reminiscence Neighborhood
dancing with a resident, looking at old family photographs or listening to a
favorite opera. Helping residents with Alzheimer's disease enjoy each day is a
primary objective of the Sunrise Reminiscence Program.
[PHOTO]
"Sunrise offers seniors with Alzheimer's disease a high quality of life by
providing them with the structure, consistency and supervision they need while
preserving their dignity and encouraging their independence. That's a difficult
balance to strike, but Sunrise does an excellent job."
- -- Dean J. Storer, M.D.
Board-Certified
Geriatric Psychiatrist
[PHOTO]
"My wife Joanne has Alzheimer's disease, and I pray each day for her health and
happiness and for her peace and contentment. I think Sunrise has given her
that, and the whole family does."
- -- Paul E. Schratwieser
15
<PAGE> 18
[PHOTO]
From left to right: Paul J. Klaassen, Chairman, President and Chief Executive
Officer; Teresa M. Klaassen, Executive Vice President and Secretary; Timothy S.
Smick, Executive Vice President and Chief Operating Officer; David W. Faeder,
Executive Vice President and Chief Financial Officer; Brian C. Swinton,
Executive Vice President, Sales and Marketing; and Thomas B. Newell, Executive
Vice President, General Counsel and President of Sunrise Development Inc.
POSITIONED FOR GROWTH
With a 15-year history as an innovator and leading provider in the assisted
living industry and a working capital base of more than $100 million, Sunrise
is well-positioned to capitalize on the growing demand for assisted living
care. The Company has a vision for making assisted living by Sunrise available
to thousands more seniors and their families across the country over the next
several years, and an aggressive yet disciplined plan to carry out that vision.
The Sunrise growth strategy includes plans to develop at least 52 new
model Sunrise communities in targeted markets by the end of 1999. The Company
plans to develop clusters of the new facilities in most of the top 20
metropolitan and suburban markets in the U.S. Sunrise's growth strategy also
includes plans to acquire select properties as a strategy for entering new
markets or strengthening its presence in recently-entered markets. The Company
plans to acquire up to nine additional facilities by the end of 1999. In total,
Sunrise expects to operate more than 90 facilities by year-end 1999, enabling
it to serve thousands more seniors and their families throughout the country.
Managing this growth will require experience and skill. To date, Sunrise
recruitment efforts have paid off in a strong management team with expertise
and many years of experience in operations, development, acquisitions and other
key areas of the assisted living field. With more than 130 team members on its
regional and headquarters staffs, and more than 2,000 on the Sunrise field
staff in homes throughout the U.S., a strong infrastructure is in place for
aggressive yet disciplined growth.
16
<PAGE> 19
INDEX TO FINANCIAL AND OTHER INFORMATION
18 Selected Financial and Operating Data
19 Management's Discussion and Analysis of Financial Condition and Results of
Operations
24 Consolidated Balance Sheets as of December 31, 1996 and 1995
25 Consolidated Statements of Operations of the Company for the years
ended December 31, 1996 and 1995 and Combined Statement of Operations of
Sunrise Entities for the year ended December 31, 1994
26 Consolidated Statement of Changes in Stockholders' Equity (Deficit) of
the Company and Combined Statement of Owner's Deficit of Sunrise Entities
27 Consolidated Statements of Cash Flows of the Company for the years ended
December 31, 1996 and 1995 and Combined Statement of Cash Flows of
Sunrise Entities for the year ended December 31, 1994
28 Notes to Consolidated and Combined Financial Statements
34 Report of Independent Auditors
35 Board of Directors, Officers and Senior Management
36 Facilities Listing and Location Map
17
<PAGE> 20
Sunrise Assisted Living, Inc.
- --------------------------------------------------------------------------------
SELECTED FINANCIAL AND OPERATING DATA
<TABLE>
<CAPTION>
Years Ended December 31,
- -----------------------------------------------------------------------------------------------------------------------------
(in thousands, except operating and other data) 1996 1995 1994 1993 1992
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA(1):
Operating revenue $ 47,345 $ 37,258 $ 33,969 $25,598 $16,879
Facility operating expenses 28,457 21,010 17,983 17,761 11,824
Facility development and pre-rental expenses 2,367 1,172 263 474 231
General and administrative expenses 10,042 6,875 4,183 2,034 1,655
Depreciation and amortization 4,048 3,009 3,160 2,799 1,355
Interest expense, net 6,425 15,327 8,023 3,491 1,862
(Loss) income before extraordinary item (4,760) (10,137) 562 (637) (171)
Extraordinary item -- -- 850 -- --
Net (loss) income(2) (3) (4,760) (10,137) 1,412 (637) (171)
EBITDA(4) 5,713 8,199 11,745 5,653 3,046
BALANCE SHEET DATA(1):
Cash and cash equivalents $101,811 $ 6,253 $ 8,089 $ 3,268 $ 2,499
Working capital (deficit) 101,855 2,051 (7,305) 1,288 741
Total assets 342,839 123,321 109,003 61,159 50,866
Total debt 144,544 122,289 110,029 55,207 45,405
Series A convertible preferred stock -- 23,964 -- -- --
Stockholders' equity (deficit) 185,824 (31,774) (16,391) (2,925) (1,716)
OPERATING AND OTHER DATA:
Facilities (at end of period):
Owned(5) 30 20 19 16 14
Managed 5 8 9 7 5
Total 35 28 28 23 19
Resident capacity (at end of period):
Owned(5) 2,584 1,557 1,473 1,289 1,067
Managed 528 712 772 652 549
Total 3,112 2,269 2,245 1,941 1,616
Occupancy rate(6) 94.1% 91.7% 94.8% 94.0% --
</TABLE>
(1) See Notes 1 and 10 of Notes to Consolidated and Combined Financial
Statements. The historical financial data for years prior to 1995
represent combined historical financial data for Sunrise Entities.
(2) Net loss per common equivalent shares was $0.51 for the year ended
December 31, 1996.
(3) Net loss for 1996 includes a one-time unusual charge of $981,000. See Note
16 of Notes to Consolidated and Combined Financial Statements.
(4) Earnings before interest, taxes, depreciation and amortization expense.
The Company has included information concerning EBITDA because it
understands that such information is used by certain investors as one
measure of a company's operating performance. EBITDA is not determined in
accordance with GAAP, is not indicative of cash provided by operating
activities and should not be considered in isolation or as a substitute
for measures of performance determined in accordance with GAAP.
(5) Includes all facilities wholly owned by the Company or in which it owns
interests. Prior to 1994, several of the owned facilities were leased from
predecessor entities.
(6) Based on monthly occupancy for owned facilities operated for at least 12
months, excluding facilities with temporary vacancies due to renovations
or resident relocation.
18
<PAGE> 21
Sunrise Assisted Living, Inc.
- -------------------------------------------------------------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The following discussion should be read in conjunction with the information
contained in the Consolidated and Combined Financial Statements, including the
related notes thereto, and the other financial information appearing elsewhere
herein. This Management's Discussion and Analysis contains certain
forward-looking statements relating to the Company's development and
acquisition programs over the next three years that involve risks and
uncertainties. The Company's actual results could differ materially from those
anticipated in these forward-looking statements as a result of certain factors,
including those set forth elsewhere herein under "Liquidity and Capital
Resources." Unless the context suggests otherwise, references herein to the
"Company" or "Sunrise" mean Sunrise Assisted Living, Inc. and its subsidiaries
and predecessor entities.
OVERVIEW
The Company is a leading provider of assisted living services to the elderly.
The Company currently operates 37 facilities in 11 states with a capacity of
approximately 3,340 residents, including 32 facilities owned by the Company or
in which it has ownership interests and five facilities managed for third
parties. The Company also operates two skilled nursing facilities owned by a
third party. The Company provides assistance with the activities of daily
living and other personalized support services ("Basic Care") in a residential
setting for elderly residents who cannot live independently but who do not need
the level of medical care provided in a skilled nursing facility. The Company
also provides additional specialized care and services to residents with
certain low acuity medical needs--Assisted Living Plus Care ("Plus Care") and
residents with Alzheimer's disease or other forms of dementia ("Alzheimer's
Care"). By offering this full range of services, the Company is able to
accommodate the changing needs of residents as they age and develop further
physical or cognitive frailties.
In January 1995, Paul J. Klaassen and Teresa M. Klaassen, the Company's
co-founders, contributed all of their interests in certain predecessor entities
to the Company in exchange for 100% of the Common Stock and simultaneously
raised $32.0 million in a private placement of Preferred Stock ($22.0 million
Series A Convertible Preferred Stock funded at closing and $10.0 million of
Series B Exchangeable Preferred Stock subject to a call exercised by the
Company in January 1996). On June 5, 1996, the Company completed its initial
public offering ("the Initial Offering"). The net proceeds to the Company from
the Initial Offering, after deducting underwriting discount and offering
expenses, were approximately $104.3 million. Upon completion of the Initial
Offering, all of the outstanding Series A Convertible Preferred Stock was
converted automatically into an equal number of shares of Common Stock and all
of the outstanding Series B Exchangeable Preferred Stock was redeemed using a
portion of the proceeds of the Initial Offering. On October 30, 1996, the
Company completed a second public offering (the "Second Offering"). The net
proceeds to the Company from the Second Offering, after deducting underwriting
discount and estimated offering expenses, were approximately $91.8 million.
During 1996, the Company completed the acquisition of six assisted and
independent living facilities, one in Santa Rosa, California and five in the
Southeast United States, for a total purchase price of $42.5 million. In
addition, the Company purchased an additional 30% interest in one of the
Company's facilities in exchange for 52,500 shares of Common Stock. On February
5, 1997, the Company acquired an assisted and independent living facility in
Valencia, California. The acquisition price was $13.8 million in cash. On
January 10, 1997, the Company entered into three purchase-and-sale agreements
with one party, giving the Company the right to purchase three properties in
Northern California for $17.6 million. One such property was acquired for $8.4
million on February 24, 1997. In addition, the Company completed development of
four of its model facilities (Raleigh, NC; Pikesville, MD; Bluebell, PA; and
Columbia, MD) which opened and began operations during 1996 and one (Oakton,
VA) in 1997. Over the next three years, the Company plans to develop at least
52 of its model facilities in major metropolitan and suburban markets
throughout the United States. During the next three years, the Company also
plans to acquire up to 9 additional assisted living facilities or other
properties that can be repositioned as Sunrise assisted living facilities. In
order to achieve its growth plans, the Company will be required to obtain a
substantial amount of additional financing. The Company currently estimates
that the net proceeds to the Company of the Initial and Second Offerings,
together with existing working capital, financing commitments and financing
expected to be available, will be sufficient to fund its development and
acquisition programs for at least the next 18 months. See "-- Liquidity and
Capital Resources".
The Company derives its revenues from two primary sources: (i) resident
fees for the delivery of assisted living services and (ii) management services
income for management of facilities owned by third parties. Historically, most
of the Company's operating revenue has come from resident fees, which in 1996
and 1995 comprised 93.3% of total operating revenue. Resident fees typically
are paid monthly by residents, their families or other responsible parties. In
1996 and 1995, approximately 99% of the Company's revenue was derived from
private pay sources. Resident fees include revenue derived from Basic Care,
community fees, Plus Care, Alzheimer's Care and other sources. Community fees
are one-time fees generally equal to 60 times the daily resident fee payable by
a resident upon admission. Plus Care and Alzheimer's Care fees are paid by
residents who require personal care in excess of services provided under the
Basic Care program. Management services income, which in 1996 and 1995
accounted for the remaining 6.7% of revenue, consists of management fees which
are generally in the range of 5% to 7% of a managed facility's total operating
revenue.
The Company classifies its operating expenses into the following
categories: (i) facility operating expenses, which include labor, food,
marketing and other direct facility expenses; (ii) facility development and
pre-rental expenses, which include non-capitalized development expenses and
pre-rental labor and marketing expenses; (iii) general and administrative
expenses, which primarily include headquarters and regional staff expenses and
other overhead costs; and (iv) depreciation and amortization. In anticipation
of its growth plans, the Company made significant investments in its
infrastructure in 1996 and 1995, and, to a lesser extent, in 1994 through the
addition of headquarters and regional staff.
19
<PAGE> 22
RESULTS OF OPERATIONS
The following table sets forth certain operating data expressed as a percentage
of operating revenue:
<TABLE>
<CAPTION>
Years Ended December 31,
- --------------------------------------------------------------------
1996 1995 1994
- --------------------------------------------------------------------
<S> <C> <C> <C>
Operating revenue 100.0% 100.0% 100.0%
Operating expenses:
Facility operating expenses 60.1 56.4 52.9
Facility development and
pre-rental expenses 5.0 3.1 0.8
General and administrative 21.2 18.5 12.3
Depreciation and amortization 8.5 8.1 9.3
- --------------------------------------------------------------------
Income from operations 5.1 13.9 24.7
Other income (expense):
Interest income 7.0 3.3 1.7
Interest expense (20.5) (44.5) (25.3)
Equity in (losses) earnings of
unconsolidated partnerships -- -- 0.1
Minority interests 0.5 -- 0.5
Unusual charge (2.1) -- --
- --------------------------------------------------------------------
(Loss) income before extraordinary item (10.1) (27.2) 1.7
Extraordinary item -- -- 2.5
- --------------------------------------------------------------------
Net (loss) income (10.1)% (27.2)% 4.2%
====================================================================
</TABLE>
YEAR ENDED DECEMBER 31, 1996 COMPARED TO THE
YEAR ENDED DECEMBER 31, 1995
Operating Revenue. Operating revenue for 1996 increased 27.1% to $47.3 million
from $37.3 million in 1995 due primarily to the growth in resident fees.
Resident fees (including community fees and fees for Basic Care, Plus Care,
Alzheimer's Care and other services) for 1996 increased 27.1% to $44.2 million
from $34.8 million in 1995. This increase was due primarily to the inclusion,
in 1996, of six acquired facilities with total revenue of $4.5 million, three
newly developed facilities with revenue totaling $2.2 million and additional
revenue generated by increases in the average resident occupancy and average
daily rate for owned facilities operated by the Company for at least 12 months
totaling $1.1 million and $1.3 million, respectively. Average resident
occupancy for owned facilities operated by the Company for at least 12 months,
excluding facilities with temporary vacancies due to renovations or resident
relocations ("Same Facilities"), was 94.1% in 1996, compared to 91.7% for 1995.
Resident occupancy, including vacancies attributable to renovations at two
facilities in order to meet requirements for accepting non-ambulatory residents
and the relocation of non-ambulatory residents at a third facility, increased
to 92.5% for 1996 compared to 89.6% for 1995. The average daily resident fee
(excluding community fees) for owned facilities operated by the Company for at
least 12 months increased to $83 for 1996 from $80 for 1995 primarily due to an
increase in the Basic Care rate in 1996 and an increase in the number of
residents receiving Plus Care and Alzheimer's Care.
Management services income for 1996 increased by $0.7 million, or 26.7%,
to $3.2 million from $2.5 million in 1995 due to an increase in management fees
and one-time consulting fees.
Operating Expenses. Operating expenses for 1996 increased 40.1% to $44.9
million from $32.1 million in 1995. The increase in operating expenses in 1996
is attributable primarily to growth in facility operating and general and
administrative expenses.
Facility operating expenses for 1996 increased 35.4% to $28.5 million from
$21.0 million in 1995. As a percentage of operating revenue, facility operating
expenses in 1996 increased to 60.1% from 56.4% in 1995. Of the $7.5 million
increase in facility operating expenses, $5.0 million was attributable to the
opening in 1996 of three newly developed facilities as well as the acquisition
of six facilities. The remaining $2.5 million increase was due to an increase
in salaries, benefits, training, marketing and other general expenses at
existing facilities.
Facility development and pre-rental expenses for 1996 increased by 102% to
$2.4 million from $1.2 million in 1995. This increase was due to a $0.7 million
increase in non-capitalized labor and related development costs, a $0.7 million
increase in start up costs offset, in part, by a $0.2 million increase in other
capitalized costs. There were 20 facilities under construction at December 31,
1996 compared to 6 facilities at December 31, 1995.
General and administrative expenses in 1996 increased 46.1% to $10.0
million from $6.9 million in 1995. As a percentage of operating revenue,
general and administrative expenses increased to 21.2% in 1996 from 18.5% in
1995. Of the $3.2 million increase in general and administrative expenses in
1996, approximately 47.3% was related to labor costs. The remaining increase of
$1.7 million was attributable to marketing, consulting, taxes, travel and other
general expenses.
The provision for bad debts was $0.7 million in 1996 and $0.2 million in
1995, respectively. Of the $0.5 million increase, $0.2 million relates to a
one-time consulting fee and $0.3 million relates to certain subordinated
management fees.
Depreciation and amortization in 1996 increased 34.5% to $4.0 million from
$3.0 million in 1995 primarily due to the opening of three developed facilities
and the acquisition of six other facilities and amortization of $0.3 million of
capitalized pre-rental costs over twelve months.
Other income (expense). Interest income for 1996 increased 168.3% to $3.3
million from $1.2 million in 1995 primarily due to a $1.7 million increase from
the investment of funds received from the Initial and Second Offerings and
interest earned on $5.8 million of revenue bonds purchased in March 1995 (the
Company has an option to purchase the facility subject to the revenue bonds, at
any time, for fair market value). Interest expense for 1996 decreased 41.3% to
$9.7 million from $16.6 million in 1995. In June 1996, the Company paid
approximately $8.6 million to a lender as payment in full of a 25%
participation interest. During 1995, the Company recorded $5.4 million of
expense related to such participation interest. In addition, the Company paid
$8.0 million to prepay a portion of the variable rate indebtedness. The lender
reduced the interest rate applicable to the $22.0 million outstanding portion
of variable rate indebtedness from LIBOR plus 5.75% to LIBOR plus 3.75%. On
March 4, 1997, the Company entered into an agreement with the lender reducing
further the interest rate from LIBOR plus 3.75% down to LIBOR plus 1.75%.
Unusual Charge. In order to avoid a possible change in the Company's
ability to continue to manage two facilities resulting from the reduction in
the Klaassens' ownership interest in the Company following completion of the
Company's Initial Offering in June 1996, the Company made a $1.0 million cash
payment to the third-party limited partner in these two facilities in exchange
20
<PAGE> 23
for the transfer to the Company by the third party of additional 1% partnership
interests in each facility (with a total book value of $18,700) and the
elimination of any requirement for the Klaassens' to maintain a specified
ownership interest in the Company. This was reflected as an unusual charge
during 1996.
Net (loss) income. The Company incurred a net loss of $4.8 million in
1996, compared to a net loss of $10.1 million in 1995. The reduction in the net
loss for 1996 resulted primarily from a $10.1 million increase in operating
revenue coupled with a $6.8 million decrease in interest expense and a $2.0
million increase in interest income offset, in part, by a $12.8 million
increase in operating expenses and a $1.0 million unusual charge. The Company
did not recognize any Federal income tax expense in 1996 because of such net
loss. At December 31, 1996, the Company had net operating loss carryforwards
for income tax purposes of approximately $15.7 million which expire in years
2010 and 2011. See Note 12 of Notes to Consolidated and Combined Financial
Statements.
YEAR ENDED DECEMBER 31, 1995 COMPARED TO THE YEAR
ENDED DECEMBER 31, 1994
Operating Revenue. Operating revenue for 1995 increased 9.7% to $37.3 million
from $34.0 million in 1994 due primarily to the growth in resident fees.
Resident fees for 1995 increased 8.1% to $34.8 million from $32.1 million in
1994. This increase was due primarily to $1.9 million of additional revenue
generated by an increase in the Basic Care rate and the inclusion of a full
year of resident fees of $1.4 million for the Gardner Park facility (opened in
September 1994), which was offset partially by an $0.8 million decline in
average resident occupancy. Resident occupancy fell from 94.8% to 91.7% in 1995
for Same Facilities. Resident occupancy was 89.6% in 1995 including vacancies
attributable to renovating two facilities in order to meet requirements for
accepting non-ambulatory residents and relocating non-ambulatory residents at a
third facility. Same Facility resident occupancy declined in 1995 largely as a
result of a decline in resident occupancy at two facilities. At these two
facilities, the Company has made management changes and instituted new
marketing programs. In addition, the Company strengthened its senior management
team by hiring a new chief operating officer.
The average daily resident fee (excluding community fees) for owned
facilities operated by the Company for at least 12 months increased 6.7% to $80
in 1995 from $75 in 1994 primarily due to a 4.4% increase in the average Basic
Care rate from $68 in 1994 to $71 in 1995 and an increase in the number of
residents receiving Plus Care and Alzheimer's Care services.
Management services income for 1995 increased by $0.7 million, or 37.0%,
to $2.5 million from $1.8 million in 1994 due to a $0.4 million, or 26.8%,
increase in management fees related to a full year of income from four
management contracts entered into in 1994, and from ancillary services totaling
$0.3 million.
Operating Expenses. Operating expenses for 1995 increased 25.3% to $32.0
million from $25.6 million in 1994. The increase in operating expenses in 1995
is attributable primarily to growth in facility operating expenses, facility
development and pre-rental expenses and general and administrative expenditures
related to building the Company's infrastructure in connection with its growth
plans.
Facility operating expenses for 1995 increased 16.8% to $21.0 million from
$18.0 million in 1994. As a percentage of operating revenue, facility operating
expenses in 1995 increased to 56.4% from 52.9% in 1994. Of the $3.0 million
increase in facility operating expenses in 1995, $1.2 million was attributable
to combination of salary increases for existing staff, increased facility-based
staffing required to handle the increased number of residents receiving Plus
Care or Alzheimer's Care and training of facility-based personnel. The balance
of the increase, $1.8 million, was due to the inclusion of a full year of
operations at the Gardner Park facility, other facility expenses such as food,
marketing, and legal, and the renovation and opening of a portion of the
Village House facility providing assisted living services.
Facility development and pre-rental expenses for 1995 increased $0.9
million to $1.2 million from $0.3 million in 1994. The increase was due to an
increase in development activities. Labor costs increased $0.4 million,
unrecoverable direct costs increased $0.6 million, and pre-rental expenses
increased $0.1 million. These increases were offset by an increase in
capitalized development expenses of $0.4 million.
General and administrative expenses in 1995 increased 64.4% to $6.9
million from $4.2 million in 1994. As a percentage of operating revenue,
general and administrative expenses in 1995 increased to 18.5% from 12.3% in
1994. Of the $2.7 million increase in general and administrative expenses in
1995, approximately 70.8% was related to labor costs including a $1.0 million
increase in salary and benefits expenses relating to the hiring in 1995 of 33
additional headquarters and regional office management staff in anticipation of
the Company's growth plans, and $0.9 million related to salary increases and
benefits for existing staff. The remaining $0.8 million increase is
attributable to marketing, consulting, and public relations and other general
expenses.
The provision for bad debts was $0.2 million and $0.1 million in 1995 and
1994, respectively. During 1994, the Company also accrued $0.3 million to
recognize anticipated losses on one of its management contracts. Also in 1994,
the Company accrued $0.1 million in anticipation of actions taken by Virginia
state and local authorities regarding licensure and state building code
violations. No loss accruals were recorded in 1995.
Depreciation and amortization in 1995 decreased 4.8% to $3.0 million from
$3.2 million in 1994. In 1994, certain predecessor limited partnerships wrote
off $0.2 million of deferred financing costs. These costs were expensed prior
to June 8, 1994 when the Company acquired all minority ownership interests in
15 properties utilizing a new debt facility.
Other income (expense). Interest income for 1995 increased 117.3% to $1.2
million from $0.6 million in 1994 primarily due to a $0.4 million increase
related to the purchase in 1995, for $5.0 million, of revenue bonds secured by
a Company-managed facility and a $0.2 million increase due to higher cash
balances related to the January 1995 private placement of Series A Convertible
Preferred Stock. Interest expense for 1995 increased 92.8% to $16.6 million
from $8.6 million in 1994. The increase in interest expense primarily was
attributable to a $95.0 million mortgage obtained by the Company in June 1994.
Interest expense increased by $4.2 million, or 79.4%, in 1995 reflecting the
inclusion of an additional five months of interest on such mortgage compared to
1994. Interest expense for 1994 and 1995 includes $0.3 million and $0.5
million, respectively, of amortization expense, which relates to a $3.2 million
loan discount recorded on such mortgage. Such discount is being amortized over
21
<PAGE> 24
the term of the mortgage. Interest expense for 1995, totaling $5.4 million,
includes accrual of interest expense relating to a 25% participation interest
and is based upon an increase during 1995 in the estimated market value of
facilities securing the mortgage. Interest expense related to other debt for
1995 decreased 58.8% to $1.3 million from $3.1 million in 1994, due to the
repayment of $71.5 million of debt with a portion of the proceeds from the
$95.0 million mortgage obtained in June 1994.
Net (loss) income. The Company incurred a net loss of $10.1 million in
1995, compared to net income of $1.4 million (after a $0.9 million
extraordinary item) in 1994. The net loss in 1995 resulted primarily from the
$6.1 million of expense recorded in 1995 relating to mortgage loan discount and
participation interest and the $6.5 million increase in operating expenses,
which were offset, in part, by the $3.3 million increase in operating revenue.
The Company did not recognize any Federal income tax expense in 1995 because of
such net loss.
LIQUIDITY AND CAPITAL RESOURCES
To date, the Company has financed its operations from long-term borrowings,
equity offerings and cash generated from operations. At December 31, 1996, the
Company had $143.1 million of outstanding debt (excluding notes payable to
affiliates) at a weighted average interest rate of 8.4%. Of such amount, the
Company had $77.9 million of fixed-rate debt (excluding a $1.8 million loan
discount) at a weighted average interest rate of 8.3%, and $65.2 million of
variable-rate debt at a weighted average interest rate of 8.5%. Increases in
prevailing interest rates could increase the Company's interest payment
obligations relating to variable-rate debt. See Note 6 of Notes to Consolidated
and Combined Financial Statements. In January 1995, the Company issued and sold
2,444,444 shares of Series A Convertible Preferred Stock in a private placement
for which the Company received gross proceeds of $22.0 million. In January
1996, the Company issued and sold 1,000,000 shares of Series B Exchangeable
Preferred Stock, receiving $10.0 million in net proceeds. On June 5, 1996, the
Company completed its Initial Offering. The net proceeds to the Company from
the Initial Offering, after deducting underwriting discount and offering
expenses, were approximately $104.3 million. Uses of the net proceeds from the
Initial Offering included $16.6 million in partial payment of the Company's
long-term debt, $10.2 million to redeem all outstanding shares of Series B
Exchangeable Preferred Stock and $34.0 million to acquire five facilities in
southeast United States. On October 30, 1996, the Company completed the Second
Offering. The net proceeds to the Company from the Second Offering, after
deducting underwriting discount and estimated offering expenses, were
approximately $91.8 million. The Company expects to use the balance of the net
proceeds from the Initial and Second Offerings to fund continued development of
up to 52 new Sunrise model facilities and up to 9 planned acquisitions over the
next three years as well as for working capital and general corporate purposes.
Working capital increased to $101.9 million at December 31, 1996, compared to
$2.1 million as of December 31, 1995, primarily from the net proceeds received
from the Initial and Second Offerings.
Cash provided by operating activities was $1.7 million for 1996, including
a $1.0 million payment to a third-party limited partner which was charged to
expenses, as compared to $0.9 million for 1995 and $2.7 million for 1994.
Unrestricted cash balances were $101.8 million and $6.3 million at December 31,
1996 and 1995, respectively.
Net cash used in investing activities totaled $113.5 million, $17.9
million and $17.0 million in 1996, 1995 and 1994, respectively. The Company's
investing activities included $104.6 million, $12.6 million and $16.1 million
in 1996, 1995 and 1994, respectively, related to the Company's development
activities. Investing activities in 1996 also included the purchase of $8.1
million of marketable securities. Investing activities in 1995 included the
purchase of $5.4 million of tax exempt mortgage revenue bonds. Investing
activities in 1994 included the purchase of minority interests in 15 facilities
using net proceeds of $5.5 million from the $95.0 million mortgage obtained in
June 1994.
During 1996, the Company's financing activities provided net cash of
$207.3 million compared to $15.1 million and $19.1 million provided in 1995 and
1994, respectively. Cash was provided by the Company's Initial and Second
Offerings, described above, as well as $28.9 million provided by additional
borrowings. During 1996, the Company paid $8.6 million as payment in full of
the 25% participating interest in cash flow and appreciation in the value of
certain properties. In addition, the Company prepaid $8.0 million of its
variable rate debt, paid $0.3 million in dividends to holders of Series B
Exchangeable Preferred Stock, and $1.4 million in various financing costs. In
1995, $9.3 million was provided by additional borrowings relating primarily to
the construction of facilities, and $20.2 million in net proceeds was provided
by the issuance of Series A Convertible Preferred Stock. In addition, $9.6
million in cash distributions were made in 1995. During 1994, the Company
consolidated its permanent financing on 15 facilities. Net cash provided by
additional borrowings amounted to $25.1 million. The Company received cash
contributions of $3.6 million and paid out dividends and distributions during
1994 totaling $10.5 million.
The Company's growth strategy contemplates the development during the next
three years of at least 52 of its model facilities with a capacity of
approximately 4,680 residents. To date, the Company has obtained zoning
approval for 28 new facilities with a resident capacity of approximately 2,463
residents, including 22 facilities under construction, and has entered into
contracts to purchase 21 additional sites, and is negotiating purchase terms
for the remaining sites. During the next three years, the Company also plans to
acquire up to 9 assisted living facilities or other properties that can be
repositioned as Sunrise assisted living facilities. The estimated cost to
complete and lease up the 52 new Sunrise model facilities targeted for
completion over the next three years is between $310 million and $520 million,
which substantially exceeds the net proceeds of the Initial and Second
Offerings and existing working capital and financing arrangements. The Company
currently estimates that the net proceeds of the Initial and Second Offerings,
together with existing working capital and financing commitments and financing
expected to be available, will be sufficient to fund its development and
acquisition programs for at least the next 18 months. Substantial additional
financing will be required to complete the Company's growth plans and to
refinance existing indebtedness if cash flows from operations do not increase
as a result of planned growth. There can be no assurance that such financing
will be available on acceptable terms.
The Company's ability to achieve its development plans will depend upon a
variety of factors, many of which are beyond the Company's control. There can
be no assurance that the Company will not suffer delays in its development
22
<PAGE> 25
program, which could slow the Company's growth. The successful development of
additional assisted living facilities will involve a number of risks, including
the possibility that the Company may be unable to locate suitable sites at
acceptable prices or may be unable to obtain, or may experience delays in
obtaining, necessary zoning, land use, building, occupancy, licensing and other
required governmental permits and authorizations. The Company may also incur
construction costs that exceed original estimates, may not complete
construction projects on schedule and may experience competition in the search
for suitable development sites. The Company relies on third-party general
contractors to construct its new assisted living facilities. There can be no
assurance that the Company will not experience difficulties in working with
general contractors and subcontractors, which could result in increased
construction costs and delays. Further, facility development is subject to a
number of contingencies over which the Company will have little control and
that may adversely affect project cost and completion time, including shortages
of, or the inability to obtain, labor or materials, the inability of the
general contractor or subcontractor to perform under their contracts, strikes,
adverse weather conditions and changes in applicable laws or regulations or in
the method of applying such laws and regulations. Accordingly, if the Company
is unable to achieve its development plans, its business, financial condition
and results of operations could be adversely affected.
In addition, there can be no assurance that the Company's acquisition of
assisted living facilities will be completed at the rate currently expected, if
at all. The success of the Company's acquisitions will be determined by
numerous factors, including the Company's ability to identify suitable
acquisition candidates, competition for such acquisitions, the purchase price,
the financial performance of the facilities after acquisition, and the ability
of the Company to integrate or operate acquired facilities effectively may have
a material adverse effect on the Company's business, financial condition and
results of operations.
The Company has obtained a commitment (subject to certain conditions
including syndication) from a financial institution for a $90.0 million credit
facility for construction and interim loans to finance the development of up to
10 assisted living facilities by a wholly owned subsidiary of the Company. To
date, of this total credit facility, the Company has closed $58.0 million. The
Company guaranteed the repayment of all amounts outstanding under this credit
facility. The credit facility is for a term of five years and is secured by
cross-collateralized first mortgages on the real property and improvements and
first liens on all other assets of the subsidiary. Advances under the credit
facility bear interest at rates from LIBOR plus 1.7% to LIBOR plus 2.9%. As
part of this credit facility, the Company has entered into a swap transaction
whereby effective during the period June 18, 1998 through June 18, 2001,
outstanding advances of up to $19.0 million under this credit facility, or
other LIBOR floating rate debt, bear interest at a fixed rate based on a fixed
LIBOR base rate of 7.3%.
A subsidiary of the Company has received a commitment for a $51.0 million
revolving construction credit facility. On February 14, 1997, the Company
closed $8.2 million of the total commitment. The credit facility provides for
construction and interim loans to finance the development of up to seven
assisted living facilities. The Company has agreed to guarantee the repayment
of all amounts outstanding under this credit facility. The credit facility is
for a term of five years and is secured by cross-collateralized first mortgages
on the real property and liens on receivables. Advances under the credit
facility bear variable interest rates based upon LIBOR plus 2.25% to LIBOR plus
2.60%. There were no amounts outstanding under this credit facility at December
31, 1996.
In March 1996, the Company also obtained a $13.0 million, five-year
unsecured credit facility to be used for development and acquisitions and
working capital needs. There were no amounts outstanding with this credit
facility at December 31, 1996.
The Company's financing documents contain financial covenants and other
restrictions that (i) require the Company to meet certain financial tests and
maintain certain escrows of funds, (ii) require that the Company's founders,
Paul Klaassen and Teresa Klaassen (the "Founders"), maintain ownership of at
least 20% of the Common Stock and that one of them serves as Chairman of the
Board and President of the Company, (iii) require consent for changes in
management or control of the Company, (iv) limit, among other things, the
ability of the Company and certain of its subsidiaries to borrow additional
funds, dispose of assets and engage in mergers or other business combinations,
and (v) prohibit the Company from operating competing facilities within certain
distances from mortgaged facilities.
At December 31, 1996, the Company had stockholders' equity of $185.8
million compared to a stockholders' deficit of $31.8 million at December 31,
1995. The change resulted primarily from (i) adding the receipt of net proceeds
from the Company's Initial and Second Offerings of $196.1 million, conversion
of Series A Convertible Preferred Stock into an equal number of common shares
for $24.0 million, $2.9 million from other common shares issued, including the
exercise of stock options, and $0.1 million from the issuance of common stock
warrants, and (ii) subtracting $0.7 million relating to distributions made
prior to completion of the Company's Initial Offering and dividends paid on
Series B Exchangeable Preferred Stock that has been redeemed and net loss for
1996 of $4.8 million.
IMPACT OF INFLATION
Resident fees from Company-owned assisted living facilities and management
services income from facilities operated by the Company for third parties are
the primary sources of revenue for the Company. These revenues are affected by
daily resident fee rates and facility occupancy rates. The rates charged for
the delivery of assisted living services are highly dependent upon local market
conditions and the competitive environment in which the facilities operate. In
addition, employee compensation expense is the principal cost element of
property operations. Employee compensation, including salary increases and the
hiring of additional staff to support the Company's growth plans, has recently
had a negative impact on operating margins and may continue to do so in the
foreseeable future.
Substantially all of the Company's resident agreements are for terms of
one year and allow, at the time of renewal, for adjustments in the daily fees
payable thereunder, and thus may enable the Company to seek increases in daily
fees due to inflation or other factors. Any such increase would be subject to
market and competitive conditions and could result in a decrease in occupancy
of the Company's facilities. The Company believes, however, that the short-term
nature of its resident agreements generally serves to reduce the risk to the
Company of the adverse effect of inflation. There can be no assurance that
resident fees will increase or that costs will not continue to increase due to
inflation or other causes.
23
<PAGE> 26
Sunrise Assisted Living, Inc.
- -------------------------------------------------------------------------------
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
- ----------------------------------------------------------------------------------------------------------------------------
(dollars in thousands) 1996 1995
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $101,811 $ 6,253
Accounts receivable, less allowance of $927 and $235 1,522 1,005
Marketable securities 8,322 --
Prepaid expenses and other current assets 2,394 2,643
- ----------------------------------------------------------------------------------------------------------------------------
Total current assets 114,049 9,901
Property and equipment, net 216,711 104,317
Investment 5,750 5,375
Restricted cash and cash equivalents 1,720 1,261
Other assets 4,609 2,467
- ----------------------------------------------------------------------------------------------------------------------------
Total assets $342,839 $123,321
============================================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable and accrued expenses $ 8,331 $ 6,547
Deferred revenue 2,988 904
Other current liabilities 103 131
Current maturities of long-term debt 772 268
- ----------------------------------------------------------------------------------------------------------------------------
Total current liabilities 12,194 7,850
Notes payable to affiliated partnerships 1,421 1,735
Interests in unconsolidated partnerships 822 620
Long-term debt, less current maturities 142,351 120,286
- ----------------------------------------------------------------------------------------------------------------------------
Total liabilities 156,788 130,491
Minority interests 227 640
Preferred stock, $0.01 par value, 10,000,000 shares authorized:
Series A convertible preferred stock, convertible and redeemable; $9 stated
value and liquidation value of $9; plus preferred return; 2,444,444 shares
issued and outstanding in 1995 -- 23,964
Common stock, $0.01 par value, 60,000,000 shares authorized, 18,529,869 and
6,019,475 shares issued and outstanding 1996 and 1995 185 60
Contributed capital (deficiency) 201,274 (19,733)
Accumulated deficit (15,635) (12,101)
- ----------------------------------------------------------------------------------------------------------------------------
Total stockholders' equity (deficit) 185,824 (31,774)
- ----------------------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity (deficit) $342,839 $123,321
============================================================================================================================
</TABLE>
See accompanying notes.
24
<PAGE> 27
Sunrise Assisted Living, Inc.
- -------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF OPERATIONS
for the years ended December 31, 1996 and 1995
COMBINED STATEMENT OF OPERATIONS OF SUNRISE ENTITIES
for the year ended December 31, 1994
<TABLE>
<CAPTION>
December 31,
- ----------------------------------------------------------------------------------------------------------------------------
(dollars in thousands, except per share data) 1996 1995 1994
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Operating revenue:
Resident fees $44,171 $ 34,752 $32,139
Management services income 3,174 2,506 1,830
- ----------------------------------------------------------------------------------------------------------------------------
47,345 37,258 33,969
Operating expenses:
Facility operating expenses 28,457 21,010 17,983
Facility development and pre-rental expenses 2,367 1,172 263
General and administrative 10,042 6,875 4,183
Depreciation and amortization 4,048 3,009 3,160
- ----------------------------------------------------------------------------------------------------------------------------
44,914 32,066 25,589
Income from operations 2,431 5,192 8,380
Other income (expense):
Interest income 3,297 1,229 566
Interest expense (9,722) (16,556) (8,589)
- ----------------------------------------------------------------------------------------------------------------------------
Total other expense (6,425) (15,327) (8,023)
Equity in (losses) earnings of unconsolidated partnerships (12) (9) 33
Minority interests 227 7 172
Unusual charge (Note 16) (981) -- --
- ----------------------------------------------------------------------------------------------------------------------------
(Loss) income before extraordinary item (4,760) (10,137) 562
Extraordinary item -- -- 850
- ----------------------------------------------------------------------------------------------------------------------------
Net (loss) income $(4,760) $(10,137) $ 1,412
============================================================================================================================
Net loss per common equivalent shares (Note 9) $ (0.51)
===============================================================================================
Supplemental net loss per common equivalent shares (Unaudited-- Note 9) $ (0.40) $ (1.15)
==============================================================================================================
</TABLE>
See accompanying notes.
25
<PAGE> 28
Sunrise Assisted Living, Inc.
- -------------------------------------------------------------------------------
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT) AND
COMBINED STATEMENT OF OWNERS' DEFICIT OF SUNRISE ENTITIES
<TABLE>
<CAPTION>
Additional Accumulated
Common Paid-In- Owners'
Stock of Capital of Deficit of Shares of Common Contributed
Sunrise Sunrise Sunrise Common Stock Capital Accumulated
(in thousands) Entities Entities Entities Stock Amount (Deficiency) Deficit Total
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1993 $ 11 $ 823 $ (6,502) $ 2,642 $ (3,026)
Acquisition of interests not previously
owned by principal shareholders 3,847 3,847
Contribution of partnership capital 3,550 3,550
Other capital contributions 29 29
Dividends (3,750) (3,750)
Cash distributions (16,433) (16,433)
Other distributions (2,020) (2,020)
Net income 495 917 1,412
- ------------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1994 11 852 (17,063) -- -- -- (191) (16,391)
Issuance of common stock for
the net assets of Sunrise Entities (11) (852) 17,063 6,019 $ 60 $(16,451) 191 --
Liability of stockholder assumed
at formation (1,448) (1,448)
Cost of issuance of Series A
convertible preferred stock (1,834) (1,834)
Net loss (10,137) (10,137)
Preferred return on Series A
convertible preferred stock (1,964) (1,964)
- ------------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1995 -- -- -- 6,019 60 (19,733) (12,101) (31,774)
Issuance of common stock warrants 135 135
Preferred return on Series A
convertible preferred stock (858) (858)
Distributions to stockholders (390) (390)
Issuance of common stock-- Initial Offering 5,700 57 104,237 104,294
Conversion of Series A convertible
preferred stock to common stock 2,444 24 24,798 24,822
Forfeiture of preferred return on
Series A convertible preferred stock (2,822) 2,822
Dividends paid on Series B
exchangeable preferred stock (348) (348)
Issuance of common stock to acquire
interest in facility 53 945 945
Exercise of employee options for common stock 259 3 1,964 1,967
Issuance of common stock-- Second Offering 4,055 41 91,750 91,791
Net loss (4,760) (4,760)
- ------------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1996 $ -- $ -- $ -- 18,530 $185 $201,274 $(15,635) $185,824
====================================================================================================================================
</TABLE>
See accompanying notes.
26
<PAGE> 29
Sunrise Assisted Living, Inc.
- -------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
for the years ended December 31, 1996 and 1995
COMBINED STATEMENT OF CASH FLOWS OF SUNRISE ENTITIES
for the year ended December 31, 1994
<TABLE>
<CAPTION>
December 31,
- ------------------------------------------------------------------------------------------------------------------------------
(in thousands) 1996 1995 1994
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Operating activities
Net (loss) income $ (4,760) $ (10,137) $ 1,412
Adjustments to reconcile net (loss) income to net
cash provided by operating activities:
Equity in losses (earnings) of unconsolidated partnerships 12 9 (33)
Minority interests (227) (7) (172)
Provision for bad debts 734 185 123
Provision for loss accrual -- -- 350
Extraordinary gain on extinguishment of debt -- -- (850)
Accretion of interest on short-term securities (215) -- --
Depreciation and amortization 4,048 3,009 3,160
Amortization of financing costs and discount on long-term debt 714 457 267
Accrual of participation mortgage interest -- 5,400 --
Changes in assets and liabilities:
(Increase) decrease:
Accounts receivable (1,250) (407) (300)
Prepaid expenses and other current assets 249 (238) (596)
Other assets (1,420) (855) 37
Increase (decrease):
Accounts payable and accrued expenses 1,784 3,539 (363)
Deferred revenue 2,084 (47) (299)
Other liabilities (28) 36 --
- ------------------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 1,725 944 2,736
Investing activities
Increase in restricted cash and cash equivalents (459) (85) (552)
Investment in property and equipment (104,634) (12,570) (16,111)
Disposition of property and equipment -- 25 --
Purchase of investment (375) (5,375) --
Net purchases of marketable securities (8,107)
Distribution from investment in unconsolidated partnerships 113 98 (374)
- ------------------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (113,462) (17,907) (17,037)
Financing activities
Organization costs paid -- -- (61)
Net proceeds from sale of Series A convertible preferred stock -- 20,166 --
Net proceeds from sale of Series B exchangeable preferred stock 10,000 -- --
Redemption of Series B exchangeable preferred stock (10,000) -- --
Dividends paid on Series B exchangeable preferred stock (348) -- --
Net proceeds from Initial Offering of common stock 104,294 -- --
Net proceeds from Second Offering of common stock 91,791
Net proceeds from exercised options 1,967 -- --
Contributions from partners -- -- 3,550
Distributions to stockholders/partners (390) (9,646) (6,786)
Net investment of minority interests (41) (35) 1,024
Additional borrowings under long-term debt 28,870 9,326 101,976
Repayment of long-term debt (17,165) (4,296) (76,841)
Financing costs paid (1,369) (313) --
Dividends -- -- (3,750)
Additional borrowings from related parties -- -- 10
Repayment of related party note payable (314) (75) --
- ------------------------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 207,295 15,127 19,122
- ------------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents 95,558 (1,836) 4,821
Cash and cash equivalents at beginning of year 6,253 8,089 3,268
- ------------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 101,811 $ 6,253 $ 8,089
==============================================================================================================================
</TABLE>
See accompanying notes.
27
<PAGE> 30
Sunrise Assisted Living, Inc.
- -------------------------------------------------------------------------------
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
as of and for the years ended December 31, 1996 and 1995
and Sunrise Entities as of for the year ended December 31, 1994
1. ORGANIZATION AND PRESENTATION
Sunrise Assisted Living, Inc. (the "Company") is a leading provider of assisted
living services for the elderly. Assisted living services provide a residence,
meals and non-medical assistance to elderly residents for a monthly fee. The
Company's services are generally not covered by health insurance and therefore
monthly fees are generally payable by the residents, their family, or another
responsible party.
The consolidated financial statements include the Company's wholly owned
subsidiaries that manage, own and develop assisted living facilities. The
consolidated financial statements also include subsidiaries that own facilities
in which the Company has equity interests ranging from 50% to 80%. It is the
Company's policy to consolidate non-wholly owned interests when, through its
managing partnership or operating agreements, status as manager of the facility
and sole general partner, the Company holds unilateral ability to conduct the
ordinary course of business of the facility. All significant intercompany
transactions and accounts have been eliminated. The Company accounts for other
significant interests on the equity method, because the Company is able to
influence significantly both the operating and financial decisions.
The Company was incorporated in Delaware on December 14, 1994. On January
4, 1995, the Company issued 6,019,375 shares of Common Stock to the majority
stockholders in exchange for all of the equity interests in predecessor
entities (the "Sunrise Entities"). The equity interests were recorded at the
historical cost of the majority stockholders (i.e., a reorganization of
entities under common control). Simultaneously, the Company sold 2,444,444
shares of Series A Convertible Preferred Stock at $9.00 per share net of
issuance costs of $1.8 million. In addition, the Company assumed notes payable
of $2.1 million at January 4, 1995 (see Note 6). Concurrent with the January 4,
1995 transaction, Sunrise Entities distributed an aggregate $9.6 million in
cash to the majority stockholders, which was recognized as a distribution
payable in Sunrise Entities' December 31, 1994 combined financial statements.
The Company effected a three-for-one stock split of the Company's Common
Stock and increased the number of authorized shares of Common Stock from
20,000,000 to 60,000,000, effective July 11, 1995. Pursuant to the
authorization of the Board of Directors and stockholders, the Company effected
on March 20, 1996 a one-for-three stock split. All share amounts reflected
herein reflect the one-for-three stock split. Authorized shares of Common Stock
remain 60,000,000.
On June 5, 1996, the Company successfully completed an initial public
offering (the "Initial Offering") of its Common Stock. A total of 5,700,000
shares were sold by the Company in the Initial Offering at a price of $20 per
share for gross proceeds of $114.0 million. The net proceeds to the Company
from the Initial Offering, after deducting underwriting discount and offering
expenses, were approximately $104.3 million.
On October 30, 1996, the Company successfully completed a second public
offering (the "Second Offering") of its Common Stock. A total of 4,055,241
shares were sold by the Company in the Second Offering at a price of $24 per
share for gross proceeds of approximately $97.3 million. The net proceeds to
the Company from the Second Offering, after deducting underwriting discount and
offering expenses, were approximately $91.8 million.
The historical financial statements for the year ended December 31, 1994
represent the combined historical results of operations and financial condition
of Sunrise Entities. Sunrise Entities, which prior to January 4, 1995 managed,
developed and owned assisted living facilities, consist of a management
company, a development company, interests in limited partnerships and limited
liability companies that owned assisted living facilities and other limited
partnerships used to hold equity interests in operating assisted living
facilities or development projects. All significant intercompany transactions
and accounts have been eliminated in the combined financial statements.
Disclosures made herein with respect to the year ended December 31, 1994
are to be read as disclosures of Sunrise Entities. All disclosures made in
reference to periods subsequent to December 31, 1994, except those specifically
identified as relating to transactions prior to the formation of the Company,
are disclosures of the Company.
2. SIGNIFICANT ACCOUNTING POLICIES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the amounts reported in the financial statements and accompanying
notes. Actual results could differ from those estimates.
REVENUE RECOGNITION
Resident fee revenue is recognized when services are rendered. Generally,
resident community fees approximating sixty times the daily residence fee are
received from potential residents upon occupancy. Resident community fees are
recognized as income over the first ninety days of the resident's stay and are
ratably refundable if the prospective resident does not move into the facility
or moves out of the facility within ninety days. Agreements with residents are
for a term of one year and are cancelable by residents with thirty days notice.
Revenue from management contracts is recognized in the month in which it is
earned in accordance with the terms of the management contract.
ALLOWANCE FOR DOUBTFUL ACCOUNTS
Details of the allowance for doubtful accounts receivable are as follows:
<TABLE>
<CAPTION>
(in thousands) 1996 1995
- ------------------------------------------------------------
<S> <C> <C>
Beginning balance $235 $ 50
Provisions for bad debts 734 185
Accounts written off (42) --
- ------------------------------------------------------------
Ending balance $927 $235
============================================================
</TABLE>
PRE-RENTAL COSTS
Costs incurred to initially rent facilities are capitalized and amortized over
12 months. All other pre-rental costs are expensed as incurred.
Pre-rental costs and accumulated amortization included in other assets are
as follows:
<TABLE>
<CAPTION>
December 31,
- -------------------------------------------------------------
(in thousands) 1996 1995
- -------------------------------------------------------------
<S> <C> <C>
Pre-rental costs $1,674 $253
Accumulated amortization (345) (11)
- -------------------------------------------------------------
$1,329 $242
=============================================================
</TABLE>
PROPERTY AND EQUIPMENT
Property and equipment are recorded at the lower of cost or net realizable
value and include interest and property taxes capitalized on long-term
construction projects during the construction period, as well as other costs
directly related to the development and construction of facilities. Maintenance
and repairs are charged to expense as incurred. Depreciation is computed using
the straight-line method over the estimated useful lives of the related assets.
The Company adopted Statement of Financial Accounting Standards ("SFAS")
No.121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed Of," in 1996. The adoption of SFAS No. 121 did not have a
material effect on the Company's operations or financial position taken as a
whole. Property and equipment of the Company are reviewed for impairment
whenever events or circumstances indicate that the asset's undiscounted
expected cash flows are not sufficient to recover its carrying amount. The
Company measures an impairment loss by comparing the fair value of the asset to
its carrying amount. Fair value of an asset is calculated as the present value
of expected future cash flows.
Construction in progress includes pre-acquisition costs and other direct
costs related to acquisition, development and construction of facilities
including certain direct costs of the Company's development subsidiary. If a
project is abandoned, any costs previously capitalized are expensed.
28
<PAGE> 31
DEFERRED FINANCING COSTS
Costs incurred in connection with obtaining permanent financing for
Company-owned facilities have been deferred and are amortized over the term of
the financing using the effective interest method.
Deferred financing fees and accumulated amortization are as follows :
<TABLE>
<CAPTION>
December 31,
- ------------------------------------------------------------
(in thousands) 1996 1995
- ------------------------------------------------------------
<S> <C> <C>
Deferred financing fees $3,915 $2,546
Accumulated amortization (948) (438)
- ------------------------------------------------------------
$2,967 $2,108
============================================================
</TABLE>
INCOME TAXES
Income taxes are provided using the liability method in accordance with
Statement of Financial Accounting Standards No. 109, "Accounting for Income
Taxes." Under the liability method of SFAS No. 109, deferred tax assets and
liabilities are recognized for the future tax consequences attributable to
differences between the financial statement carrying amounts of existing assets
and liabilities and their respective tax basis (temporary differences).
CASH AND CASH EQUIVALENTS
The Company considers cash and cash equivalents to include currency on hand,
demand deposits, and all highly liquid investments with a maturity of three
months or less at the date of purchase.
MARKETABLE SECURITIES
At December 31, 1996, marketable securities consisted of high-quality
commercial paper with maturities not greater than 182 days at date of purchase.
These securities are classified as available-for-sale in accordance with
Statement of Financial Accounting Standards No. 115 ("SFAS 115"). The carrying
amount of these securities approximates their market value at December 31,
1996.
STOCK-BASED COMPENSATION
The Company grants stock options for a fixed number of shares to employees with
an exercise price generally equal to the fair value of the shares at the date
of grant. The Company accounts for stock option grants in accordance with APB
Opinion No. 25, Accounting for Stock Issued to Employees and accordingly
recognizes no compensation expense for the stock option grants.
INTERESTS IN UNCONSOLIDATED PARTNERSHIPS
The Company's interest in accumulated losses of unconsolidated partnership's
distributions are recorded below the Company's cost basis, which reflects the
Company's obligations as the general partner. The Company has no liability for
any other material commitments or contingencies of partnerships in which it is
a general partner.
RECLASSIFICATIONS
Certain 1995 and 1994 balances have been reclassified to conform with the 1996
presentation.
3. PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
<TABLE>
<CAPTION>
December 31,
- -------------------------------------------------------------------
(in thousands) Asset Lives 1996 1995
- -------------------------------------------------------------------
<S> <C> <C> <C>
Land and land improvements 10 yrs. $ 25,362 $ 13,072
Building and building improvements 40 yrs. 137,369 83,013
Furniture and equipment 10 yrs. 14,996 10,404
- -------------------------------------------------------------------
177,727 106,489
Less accumulated depreciation
and amortization (18,609) (15,185)
- -------------------------------------------------------------------
159,118 91,304
Construction in progress 57,593 13,013
- -------------------------------------------------------------------
$216,711 $104,317
===================================================================
</TABLE>
4. INVESTMENT
On March 1, 1995, the Company purchased all of the outstanding mortgage revenue
bonds used to finance a facility managed by the Company. The 10% Bucks County
Industrial Development Authority, First Mortgage Revenue Bonds, July 1, 2019,
having a face value of $12.5 million, were purchased for $5,000,000. The bonds
were in financial default when purchased.
On June 30, 1995, the bonds were restructured, at no gain or loss to the
Company, to reduce their face amount to $5,750,000 (Series A and C) and provide
the facility managed by the Company additional funding up to $750,000 for
renovations (Series B). Interest only is payable until maturity. The balances
outstanding at December 31, 1996 and 1995 are as follows:
<TABLE>
<CAPTION>
Face Amount
December 31,
- ---------------------------------
Description 1996 1995 Interest Rate Maturity Date
- -----------------------------------------------------------------------
<S> <C> <C> <C> <C>
Series A $5,000 $5,000 11% July 1, 2025
Series B 750 375 11% July 1, 2015
Series C 750 750 20% subject to July 1, 2010
available cash
Bond discount (750) (750)
- ---------------------------------
$5,750 $5,375
=================================
</TABLE>
Subsequent to June 30, 1995, all interest payments on these bonds are
current. The Company recognized $752,000 and $443,000 of interest income during
1996 and 1995, respectively, on this investment. These bonds are classified as
available-for-sale in accordance with SFAS 115. Management believes the net
carrying cost of the bonds approximates market value at December 31, 1996 and
1995.
5. RECEIVABLES AND PAYABLES FROM AFFILIATES
Included in prepaid and other current assets are net receivables from
unconsolidated partnerships of $1.0 million and $1.4 million as of December 31,
1996 and 1995, respectively.
Notes payable to affiliated entities consisted of the following:
<TABLE>
<CAPTION>
December 31,
- -----------------------------------------------------------------------------
(in thousands) 1996 1995
- -----------------------------------------------------------------------------
<S> <C> <C>
Notes to related limited partnerships, principal
and interest due December 31, 1999.
Interest accrues at 8% annually $1,381 $1,435
Notes due to an employee and an entity
related to that employee. Interest accrues at
18% annually, principal due June 5, 1999 40 100
Note payable assumed upon formation of the Company
due December 31, 1999, bearing no interest -- 200
- -----------------------------------------------------------------------------
$1,421 $1,735
=============================================================================
</TABLE>
6. LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
December 31,
- --------------------------------------------------------------------------
(in thousands) 1996 1995
- --------------------------------------------------------------------------
<S> <C> <C>
Multi-Property/Participating Blanket First
Mortgage (the "Multi-Property Mortgage") $ 87,000 $ 95,000
Other mortgages and notes payable 25,158 9,745
Accrued participation interest -- 8,600
Outstanding draws on construction notes payable 32,815 9,685
Line of credit -- --
Discount on the Multi-Property Mortgage long-term
debt less amortization of $1,350 and $724 (1,850) (2,476)
- --------------------------------------------------------------------------
143,123 120,554
Current maturities (772) (268)
- --------------------------------------------------------------------------
$142,351 $120,286
==========================================================================
</TABLE>
29
<PAGE> 32
The Multi-Property Mortgage is collateralized by a blanket first mortgage
on all assets of a subsidiary of the Company, consisting of 15 facilities which
had a book value of approximately $79.0 million at December 31, 1996. The
Multi-Property Mortgage consists of two separate debt classes. Class (A) in the
amount of $65.0 million bears a fixed interest rate of 8.56% and is interest
only until the maturity date of May 31, 2001. Class (B) in the amount of $22.0
million bears a variable interest rate. Class (B) is interest only until July
1, 1997 at which time principal and interest payments are due using a
twenty-year amortization schedule. In June 1996, the Company prepaid $8.0
million of its variable rate debt. The interest rate applicable to the
remaining balance of the floating rate debt was reduced from LIBOR plus 5.75%
to LIBOR plus 3.75% and effective March 4, 1997, it was further reduced to
LIBOR plus 1.75%. The lender received additional interest based on 25% of net
cash flows as specified in the loan documents, which amounted to $10,000 in
1996, $347,000 in 1995 and $370,000 in 1994. In June 1996, the Company paid the
lender $8.6 million as payment in full of the lender's 25% participating
interest in cash flow and appreciation in the value of certain properties.
A participation interest of $3.2 million payable in connection with the
Multi-Property Mortgage was recorded at the loan date. A corresponding amount
was recorded as loan discount and is being amortized over the life of the loan.
Amortization of the discount of $626,000, $457,000 and $267,000 has been
included as interest expense in 1996, 1995 and 1994, respectively. During 1995,
the Company revised its estimate of the market value of the properties financed
by the Multi-Property Mortgage. Additional participation interest on the
Multi-Property Mortgage of $5.4 million was accrued and expensed through
December 31, 1995 based on the increase in the properties' estimated market
value during 1995.
The other mortgages and notes payable relate primarily to four facilities
whereby outstanding balances are collateralized by the total assets of the
respective facility. The book value of such assets at December 31, 1996 was
$32.7 million. Payments of principal and interest are paid monthly. Interest
rates range from 6.875% to 8.75% with remaining maturities ranging from two to
thirty-seven years.
The Company has obtained a commitment (subject to certain conditions
including syndication) from a financial institution for a $90.0 million credit
facility for construction and interim loans to finance the development of up to
10 assisted living facilities of a wholly-owned subsidiary of the Company. As
of December 31, 1996, the Company had closed $58.0 million of the total
commitment. The Company guaranteed the repayment of all amounts outstanding
under this credit facility. The credit facility is for a term of five years and
is secured by cross-collateralized first mortgages on the real property and
improvements and first liens on all other assets of the subsidiary. Advances
under the facility bear interest at rates from LIBOR plus 1.70% to LIBOR plus
2.90%. As part of this line, the Company has entered into a swap transaction
whereby effective during the period June 18, 1998 through June 18, 2001,
outstanding advances of up to $19.0 million under this credit facility, or
other LIBOR floating rate debt, bear interest at a fixed rate based on a fixed
LIBOR base rate of 7.3%. As of December 31, 1996 there were $10.4 million of
advances outstanding under this facility secured by six facilities.
On October 3, 1996, a subsidiary of the Company received a commit-ment for
a $51.0 million revolving construction credit facility to develop up to seven
assisted living facilities. On February 14, 1997, the Company closed $8.2
million of the total commitment. The Company has guaranteed the repayment of
all amounts outstanding under this credit facility. The credit facility is for
a term of five years and is secured by cross-collateralized first mortgages on
the real property and liens on receivables. Advances under the credit facility
bear variable interest rates based upon LIBOR plus 2.25% to LIBOR plus 2.60%.
There were no amounts outstanding under this credit facility at December 31,
1996.
Other construction notes have total available borrowings of $39.3 million.
The notes bear interest based on various published interest rate indices. At
December 31, 1996, interest rates on the notes ranged from 7.53% to 8.48%,
remaining maturities ranged from four to seven years, and the notes were
secured by five facilities.
The Company also has a $13.0 million unsecured credit facility to be used
for development and acquisitions and working capital needs. The credit facility
is for a term of five years. Advances under the facility bear interest at a
rate per annum, fluctuating daily, equal to (at the Company's choice) either
one and one-half of one percent plus the greater of (i) the lender's prime
lending rate and (ii) the Federal funds rate plus one-half of one percent, or
the average LIBOR rate for 1,2,3, and 6 months, divided by one minus a reserve
percentage. The reserve percentage is that of maximum reserve requirement for
member banks of the Federal Reserve System in New York City. The Company issued
to the lender warrants to purchase a total of 50,000 shares of common stock.
The per share exercise price of the warrants is $17.00. There were no amounts
outstanding under the unsecured credit facility at December 31, 1996.
The Company's financing documents contain financial covenants and other
restrictions that (i) require the Company to meet certain financial tests and
maintain certain escrows of funds, (ii) require that the Company's founders,
Paul Klaassen and Teresa Klaassen (the "Founders"), maintain ownership of at
least 20% of the Common Stock and that one of them serves as Chairman of the
Board and President of the Company, (iii) require consent for changes in
management or control of the Company, (iv) limit, among other things, the
ability of the Company and certain of its subsidiaries to borrow additional
funds, dispose of assets and engage in mergers or other business combinations,
and (v) prohibit the Company from operating competing facilities within certain
distances from mortgaged facilities.
Principal maturities of long-term debt as of December 31, 1996 are as
follows:
<TABLE>
(in thousands)
- ------------------------------------------------------------
<S> <C>
1997 $ 772
1998 5,140
1999 7,338
2000 1,270
2001 102,162
Thereafter 26,441
- ------------------------------------------------------------
$143,123
============================================================
</TABLE>
Interest paid totaled $10.6 million, $10.2 million and $6.2 million in
1996, 1995 and 1994, respectively, of which $13,000, $18,000 and $17,000 in
1996, 1995 and 1994, respectively, are related to notes payable to related
parties. Interest capitalized was $2.0 million, $167,000, and $138,000 in 1996,
1995 and 1994, respectively.
Restricted cash and cash equivalents at December 31 consists of the
following:
<TABLE>
<CAPTION>
(in thousands) 1996 1995
- ---------------------------------------------------------------------------
<S> <C> <C>
Under the Multi-Property Mortgage,
real estate tax escrows, operating and
capital reserves $ 769 $1,105
Other mortgage related real estate tax escrows
and resident security deposits 951 156
- ---------------------------------------------------------------------------
$1,720 $1,261
===========================================================================
</TABLE>
In June 1994, $3,350,000 of second-trust mortgages related to two of the
predecessor limited partnerships, were prepaid for $2,500,000. The gain on
prepayment has been reflected as an $850,000 extraordinary gain in the combined
statements of operations.
7. REDEEMABLE PREFERRED STOCK
The Company has authorized 10,000,000 shares of $0.01 par value of preferred
stock.
On January 4, 1995, the Company issued 2,444,444 shares of Series A
Convertible Preferred Stock (the "Series A Preferred Stock"). The Series A
Preferred Stock had a 9% preferred return, compounded annually, payable,
together with
30
<PAGE> 33
the stated value of $9 per share, upon redemption. On June 5, 1996, all of the
2,444,444 outstanding shares of Series A Preferred Stock of the Company were
converted into an equal number of shares of Common Stock. Preferred return of
$2,821,500 through the conversion date was forfeited upon conversion.
Each Series A Preferred stockholder was obligated to purchase, upon call
by the Company, its pro rata portion of 1,000,000 shares of Series B
Exchangeable Preferred Stock for $10 per share, or $10,000,000. On January 19,
1996, the Company exercised the call. Upon completion of the Initial Offering
on June 5, 1996, the Company redeemed all 1,000,000 shares of Series B
Exchangeable Preferred Stock at a redemption price of $10 per share plus
accrued dividends of $165,000.
8. STOCK OPTION PLANS AND STOCKHOLDER RIGHTS AGREEMENT
The Company has stock option plans providing for the grant of incentive and
nonqualified stock options to employees, directors, consultants and advisors.
These plans provide for the grant of options to purchase up to 2,398,065 shares
of Common Stock. The option exercise price and vesting provisions of such
options are fixed when the option is granted. The options expire ten years from
the date of grant and generally vest over a four year period. The option
exercise price is generally not less than the fair market value of a share of
Common Stock on the date the option is granted. The Company also has a stock
option agreement with one of its senior executives. The agreement, as amended,
is effective as of January 4, 1995 and covers 450,000 shares of Common Stock
that have been reserved for issuance at an exercise price of $8.00. The
remaining 300,000 options outstanding expire in ten years of which 225,000 are
exercisable.
A summary of the Company's stock option activity, and related information
for the years ended December 31, are presented below:
<TABLE>
<CAPTION>
1996 1995
--------------------------------------------------
Weighted- Weighted-
Shares Average Shares Average
Options (000) Exercise Price (000) Exercise Price
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Outstanding at beginning of year 952 $ 6.50 0
Granted 1,911 21.74 958 $6.50
Exercised (258) 7.64 0
Forfeited (48) 5.82 (6) 6.30
Expired -- --
- ---------------------------------------------------------------------------------------
Outstanding-- end of year 2,557 $17.79 952 $6.50
=======================================================================================
</TABLE>
The following table summarizes information about stock options outstanding
at December 31, 1996:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
-------------------------------------------------------------
Weighted- Weighted- Weighted-
Range of Number Average Average Number Average
Exercise Outstanding Remaining Exercise Exercisable Exercise
Prices (000) Contractual LifePrice (000) Price
- --------------------------------------------------------------------------------
<C> <C> <C> <C> <C> <C>
$ 3.00 to 8.00 689 8.43 $ 6.41 308 $ 7.11
10.50 to 20.00 707 9.30 16.15 161 17.29
21.50 to 25.63 1,161 9.95 25.54 58 25.63
- --------------------------------------------------------------------------------
2,557 527
================================================================================
</TABLE>
On April 25, 1996, the Board of Directors adopted the 1996 Directors'
Stock Option Plan (the "Directors' Plan"). Any director who is a member of the
Board of Directors' who is not an officer or employee of the Company or any of
its subsidiaries (other than the persons elected as director representatives of
the holders of Series A Preferred Stock) is eligible to receive options under
the Directors' Plan. An aggregate of 50,000 shares of Common Stock are reserved
for issuance to participants under the Directors' Plan. The option exercise
price will not be less than the fair market value of a share of Common Stock on
the date the option is granted. The period for exercising an option begins six
months after the option is granted and generally ends ten years from the date
the option is granted. Options granted under the Directors' Plan vest
immediately. All options to be granted under the Directors' Plan will be
non-incentive stock options. As of December 31, 1996, no options have been
granted.
Pro forma information regarding net income and earnings (loss) per share
is required by Statement of Financial Accounting Standards No. 123, and has
been determined as if the Company had accounted for its employee stock options
under the fair value method of that Statement. The fair value for these options
was estimated at the date of grant using the Black-Scholes option pricing model
with the following weighted average assumptions for 1996 and 1995: risk-free
interest rate of 6.2 to 6.5 percent; dividend yield of 0 percent; expected
lives of 7 to 10 years; and volatility of 36.8 percent.
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions including the expected stock price
volatility. Because the Company's employee stock options have characteristics
significantly different from those of traded options, and because changes in
the subjective input assumptions can materially affect the fair value estimate,
in management's opinion, the existing models do not necessarily provide a
reliable single measure of the fair value of its employee stock options.
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. The Company's
pro forma information follows:
<TABLE>
<CAPTION>
December 31,
- ------------------------------------------------------------------
(in thousands, except per share data) 1996 1995
- ------------------------------------------------------------------
<S> <C> <C>
Net Loss
As reported $(4,760) $(10,137)
Pro forma $(9,551) $(10,377)
Loss per share
As reported $ (0.51)
Pro forma $ (0.92)
</TABLE>
The weighted average fair value of options granted during 1996 and 1995
were $13.36 and $1.78, respectively.
The Board of Directors has adopted a Stockholders Rights Agreement
("Rights Agreement") effective April 25, 1996. All shares of Common Stock
issued by the Company between the date of adoption of the Rights Agreement and
the Distribution Date (as defined below) have rights attached to them. The
Rights expire ten years after adoption of the Rights Agreement. Each right,
when exercisable, entitles the holder to purchase one one-thousandth of a share
of Series C Junior Participating Preferred Stock at a price of $85.00 (the
"Purchase Price"). Until a right is exercised, the holder thereof will have no
rights as a stockholder of the Company.
The rights initially attach to the Common Stock. The rights will separate
from the Common Stock and a distribution of rights certificates will occur (a
"Distribution Date") upon the earlier to occur of (i) 10 days following a
public announcement that a person or group (an "Acquiring Person") has
acquired, or obtained the right to acquire, beneficial ownership of 20% or more
of the outstanding shares of Common Stock (the "Stock Acquisition Date") or
(ii) 10 business days (or such later date as the Board of Directors may
determine) following the commencement of a tender offer or exchange offer, the
consummation of which would result in the beneficial ownership by a person of
20% or more of the outstanding shares of Common Stock. However, neither Paul J.
Klaassen nor Teresa M. Klaassen (nor their affiliates associates and estates)
each of whom, as of the date of adoption of the Rights Agreement, beneficially
owned in excess of 20% of the outstanding shares of Common Stock will be deemed
an "Acquiring Person," unless they acquire an additional 2% of the Common Stock
outstanding at the time of completion of the Company's Initial Offering.
In general, if a person becomes the beneficial owner of 20% or more of the
then outstanding shares of Common Stock, each holder of a right may exercise
the right by purchasing Common Stock having a value equal to two times the
Purchase Price. If at any time following the stock acquisition date (i) the
Company is acquired in a merger or other business combination transaction in
which it is not the surviving corporation (other than a merger which follows an
offer described in the preceding paragraph), or (ii) 50% or more of
31
<PAGE> 34
the Company's assets or earning power is sold or transferred, each holder of a
right shall have the right to receive, upon exercise, common stock of the
acquiring company having a value equal to two times the Purchase Price. The
Board of Directors of the Company generally may redeem the rights at a price of
$.005 per right at any time until ten days after an acquiring person has been
identified as such.
9. HISTORICAL AND SUPPLEMENTAL NET LOSS PER COMMON SHARE
The Company's net loss per share calculations are based upon the weighted
average number of shares of Common Stock outstanding. Pursuant to the
requirements of the Securities and Exchange Commission Staff Accounting
Bulletin No. 83, options to purchase Common Stock issued at prices below the
initial public offering price during the twelve months immediately preceding
initial filing of the registration statement relating to the Initial Offering,
have been included in the computation of net loss per share as if they were
outstanding through the date of the Initial Offering (using the treasury stock
method assuming repurchase of common stock at the estimated Initial Offering
price). Other shares issuable upon the exercise of stock options or conversion
of redeemable convertible preferred stock have been excluded from the
computation because the effect of their inclusion would be anti-dilutive.
Subsequent to the Company's Initial Offering, options are included under the
treasury stock method to the extent they are dilutive. Weighted average shares
used to calculate the supplemental net loss per share differs from the weighted
average on a historical basis due to the inclusion of the shares of Common
Stock resulting from the assumed conversion at the beginning of the applicable
period of the Series A Preferred Stock.
The following table summarizes the computations of share amounts used and
the computation of supplemental net loss per common share presented in the
accompanying consolidated statements of operations:
<TABLE>
<CAPTION>
1996 1995
- ----------------------------------------------------------------------------------------
Historical Supplemental Supplemental
- ----------------------------------------------------------------------------------------
unaudited unaudited
<S> <C> <C> <C>
Net loss per share data:
Common and common equivalent shares:
Weighted average number of
shares of common stock
outstanding during the period 11,473,772 11,473,772 6,019,475
Options to purchase common stock
issued within one year of Initial
Offering using treasury stock method 215,630 215,630 362,208
Adjustment to reflect conversion
of Series A Preferred Stock
as of January 1, 1995 -- 1,041,894 2,444,444
- ---------------------------------------------------------------------------------------
Total common and common
equivalent shares of stock
considered outstanding during
the period 11,689,402 12,731,296 8,826,127
=======================================================================================
Net loss $ (4,760,000) $ (4,760,000) $(10,137,000)
Dividend preference attributable
to Series A Preferred Stock (858,000) -- --
Dividends attributable to Series B
Exchangeable Preferred Stock (348,000) (348,000) --
- ---------------------------------------------------------------------------------------
Net loss attributable to
common stockholders $ (5,966,000) $ (5,108,000) $(10,137,000)
=======================================================================================
Net loss per common
equivalent shares $ (0.51) $ (0.40) $ (1.15)
=======================================================================================
</TABLE>
10. ACQUISITIONS
On February 29, 1996, the Company acquired a 120-unit assisted living facility
located in Santa Rosa, California. The acquisition price was $8.5 million
including the assumption of the existing mortgage of $5.2 million. On May 28,
1996, the Company purchased an additional 30% interest held by a director in
one of the Company's facilities in exchange for 52,500 shares of Common Stock.
The purchase price of $945,000 was determined based on a valuation of the
facility prepared by the Company based primarily upon the present value of net
operating income from the facility. On October 8, 1996, the Company completed
its purchase of five facilities consisting of 498 total units located in the
southeast United States for $34.0 million in cash. On February 5, 1997, the
Company acquired a 120-unit assisted and independent living facility in
Valencia, California. The acquisition price was $13.8 million in cash.
The pro forma unaudited results of operation for the years ended December
31, 1996 and 1995, assuming consummation of each purchase as of January 1, are
as follows:
<TABLE>
<CAPTION>
December 31,
- ---------------------------------------------------------------
(in thousands, except per share data) 1996 1995
- ---------------------------------------------------------------
<S> <C> <C>
Net operating revenue $59,267 $52,499
Net loss $(1,909) $(7,296)
Net loss per common and common
equivalent share $ (0.27)
</TABLE>
11. COMMITMENTS
On June 8, 1994 the Company exchanged a minority interest in an operating
facility for all of the operating assets of three related limited partnerships
(the "LPs"). The Company does not directly own any interest in the LPs. In
addition, the Company has unconditionally guaranteed that it will fund any
shortfall in cash required by the three LPs, to honor the LPs' commitments in
1997, to provide a guaranteed 9% return to the limited partners and to
repurchase the limited partnership interests of the limited partners. The
combined cash shortfall, if the repurchase had been completed at December 31,
1996, would have been approximately $2.5 million. The guarantees are considered
to be contingent acquisition costs. The actual amount of cash shortfall of the
LPs, if any, will depend on the cash distributions and residual value of the
minority interests transferred to the LPs. If the Company is required to fund
any cash shortfall in accordance with the guarantees, the carrying value of the
net assets required in the exchange would be increased. The Company does not
have any requirement to fund this or any other cash shortfall as of December
31, 1996.
The Company leases its corporate and regional office space under various
leases. The leases have terms of five years with an option to terminate after
twelve months from the most recent expansion commencement, or January 1, 1997.
The initial annual lease payments amount to $258,000, and the base rent is
subject to annual increases based on the Consumer Price Index from a minimum of
2% to a maximum cap of 3% per year. Various other leases expire on June 15,
1999 and September 30, 2001.
The Company also has entered into operating leases for four facilities and
a long-term ground lease related to another facility, each of which are
currently under construction and are expected to commence operations in 1997.
The operating lease terms vary from fifteen years, with two ten-year extension
options to seventy-three years. The ground lease has a term of ninety-nine
years.
Future minimum lease payments under office equipment, ground and operating
leases as of December 31, 1996 are as follows:
<TABLE>
(in thousands)
- ------------------------------------------------------------
<S> <C>
1997 $1,207
1998 1,949
1999 1,920
2000 1,864
2001 1,781
- ------------------------------------------------------------
$8,721
============================================================
</TABLE>
The Company's growth strategy is to develop at least 52 new assisted living
facilities over the next three years. In conjunction with the growth strategy,
the Company had 22 facilities under construction at March 4, 1997. Total
project
32
<PAGE> 35
costs for these 22 facilities is expected to be approximately $196.7 million of
which $81.3 million has been incurred as of March 4, 1997. In addition, the
Company has entered into contracts to purchase an additional 21 property sites
and lease two additional sites for future development. Total contracted
purchase price of these sites amounts to $26.6 million.
In accordance with the formation agreements of two unconsolidated
affiliates, the Company can be required to repurchase the remaining interests
in those affiliates. These rights can be exercised beginning 2001 and 2002
respectively for each of the two facilities and will be based upon 112.5% of
the facilities appraised fair market value or 115% if exercised after twelve
years. The aggregate carrying value of the remaining interests for the two
unconsolidated affiliates was $0.8 million at December 31, 1996.
On January 10, 1997 the Company entered into three purchase-and-sale
agreements, giving the Company the right to purchase three properties in
Northern California for $17.6 million. The properties include a 74-unit
assisted living community in the Napa Valley; a 73-unit assisted living
property in Walnut Creek that is currently under construction (acquired by the
Company on February 24, 1997); and a 3.5 acre site in Oakland Hills on which
the Company plans to build a 75- to 80-unit assisted living facility. Because
the purchase-and-sale agreements are subject to, among other things, the
satisfactory completion by the Company of a financial, accounting, regulatory
and property due diligence review, there is no assurance that the acquisition
of the remaining two properties will be consummated.
12. INCOME TAXES
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amount of assets and liabilities for financial reporting
purposes and the amount used for income tax purposes. Prior to formation of the
Company on January 4, 1995 (see Note 1) Sunrise Entities were held in
partnerships, limited liability companies, and S corporations, all of which
passed through tax liabilities and benefits to the owners. The transfer of
assets at the formation of the Company was taxable, in part to the owners.
Accordingly, the tax basis of a majority of the property and equipment of the
Company exceeds its respective book basis for financial reporting purposes.
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities recognized as
of December 31, 1996 and 1995 are presented below:
<TABLE>
<CAPTION>
December 31,
- -------------------------------------------------------------
(in thousands) 1996 1995
- -------------------------------------------------------------
<S> <C> <C>
Deferred tax assets:
Property and equipment $ 6,409 $ 6,664
Participating interest -- 3,483
Operating loss carryforward 6,452 1,563
Deferred revenue 1,485 364
Other 1,654 95
- ---------------------------------------------------------------
Total gross deferred tax assets 16,000 12,169
Less valuation allowance (15,236) (11,166)
Deferred tax liabilities:
Loan discount (764) (1,003)
- ---------------------------------------------------------------
Net deferred tax amount $ -- $ --
===============================================================
</TABLE>
At December 31, 1996, the Company had net operating loss carryforwards for
income tax purposes of approximately $15.7 million which expire from 2010
through 2011. A valuation allowance is provided when it is more likely than not
that some portion or all of the deferred tax assets will not be realized. The
Company is in a cumulative pretax loss for the latest three years for financial
reporting purposes. Recognition of deferred tax assets will require generation
of future taxable income. There can be no assurance that the Company will
generate any earnings or any specific level of earnings in future years.
Therefore, the Company established a valuation allowance on deferred tax assets
of approximately $15.2 million as of December 31, 1996.
Significant components of the provision for income taxes are as follows
for the years ended:
<TABLE>
<CAPTION>
December 31
- ------------------------------------------------------------
(in thousands) 1996 1995
- ------------------------------------------------------------
<S> <C> <C>
Current:
Federal $ -- $ --
State -- --
Total current -- --
- ------------------------------------------------------------
Deferred:
Federal (3,348) (3,524)
State (722) (674)
Increase in valuation allowance 4,070 4,198
- ------------------------------------------------------------
Total deferred $ -- $ --
============================================================
</TABLE>
The effective tax rate on income before income taxes varies from the
statutory federal income tax rate for the years ended December 31 as follows:
<TABLE>
<CAPTION>
1996 1995
- --------------------------------------------------------------
<S> <C> <C>
Statutory rate (34)% (34)%
State taxes, net (7) (6)
Valuation allowance 41 40
- --------------------------------------------------------------
0% 0%
==============================================================
</TABLE>
13. RELATED-PARTY TRANSACTIONS
SUNRISE FOUNDATION, INC.
Stockholders who are officers of the Company operate a school and a day care
center through a not-for-profit organization, Sunrise Foundation, Inc. ("SFI").
SFI reimbursed the Company monthly for use of office facilities and support
services in the amounts of $60,000 per year in 1996, 1995 and 1994. Such
amounts are included in management services income.
GROUND LEASE
The Company has a ninety-nine year ground lease with one of the Company's
Founders. The ground lease expires in May 2085. The basic monthly rent is
adjusted annually based on the CPI. Rent expense under this lease was $262,000,
$255,000 and $248,496 for the years ended December 31, 1996, 1995 and 1994,
respectively. The Company subleases one-half of this ground lease to SFI. The
sublease expires in May 2085 and requires payments equal to 50% of all payments
made by the Company under the ground lease. Sublease rental income was
$132,000, $127,000 and $124,000 for the years ended December 31, 1996, 1995 and
1994, respectively. Rent expense, included in facility operating expenses, is
recorded net of the sublease income.
OTHER
The Founders lease certain real property located in Fairfax County, Virginia
for use as a residence pursuant to a ninety-nine year ground lease with the
Company dated June 7, 1994. The rent is $1.00 per month. This property is part
of a parcel, which includes a facility, that was transferred to the Company on
June 8, 1994.
A director of the Company made a capital contribution of $500,000 in
exchange for a 30% membership interest in a limited liability company which
operates one of the Company's facilities. On May 28, 1996, the Company
purchased the 30% interest in exchange for 52,500 shares of Common Stock (see
Note 10). Distributions made by the Company to the director in 1996, 1995 and
1994 aggregated $41,000, $40,000 and $36,000, respectively.
14. PROFIT-SHARING PLAN
The Company has a profit-sharing plan (the "Plan") under Internal Revenue Code
Section 401(k). All employees of the Company are covered by the Plan. The Plan
contains three elements -- employee salary contributions, matching employer
contributions, and special discretionary employer contributions. All
33
<PAGE> 36
full-time employees who have twelve months of employment are eligible to
participate in the Plan. Deferred salary contributions are made through pre-tax
salary deferrals of between 1% and 16%.
The Plan provides that the employer will contribute $0.25 for every dollar
the employee contributes, up to 7% of the employee's compensation. Matching
contributions made by the Company totaled $88,000, $80,000 and $39,000 during
1996, 1995 and 1994, respectively. No discretionary profit-sharing
contributions were made during 1996, 1995 or 1994.
15. FAIR VALUE OF FINANCIAL INSTRUMENTS
The following disclosures of estimated fair value were determined by
management, using available market information and valuation methodologies.
Considerable judgment is necessary to interpret market data and develop
estimated fair value. Accordingly, the estimates presented herein are not
necessarily indicative of the amounts the Company could realize on disposition
of the financial instruments. The use of different market assumptions or
estimation methodologies may have an effect on the estimated fair value
amounts. The fair value of the investment is discussed in Note 4.
Cash equivalents, accounts receivable, accounts payable and accrued
expenses, marketable securities, investments and other current assets and
liabilities are carried at amounts which reasonably approximate their fair
values.
Fixed rate debt with an aggregate carrying value of $77.9 million
(excluding a $1.8 million loan discount) has an estimated aggregate fair value
of $78.9 million at December 31, 1996. Estimated fair value of fixed rate debt
is based on interest rates currently available to the Company for issuance of
debt with similar terms and remaining maturities. The estimated fair value of
the Company's variable rate debt is estimated to be approximately equal to its
carrying value of $65.2 million at December 31, 1996. The interest rate swap
related to $19.0 million of LIBOR floating rate debt (see Note 6) has an
estimated fair value of $(148,000) at December 31, 1996.
Disclosure about fair value of financial instruments is based on pertinent
information available to management as of December 31, 1996. Although
management is not aware of any factors that would significantly affect the
reasonable fair value amounts, such amounts have not been comprehensively
revalued for purposes of these financial statements since December 31, 1996 and
current estimates of fair value may differ from the amounts presented herein.
16. UNUSUAL CHARGE
To avoid a possible change in the Company's ability to continue to manage two
facilities resulting from the reduction in the ownership interest in the
Company of Paul J. Klaassen, the Company's Chairman of the Board, President,
Chief Executive Officer and co-founder, and Teresa M. Klaassen, the Company's
Executive Vice President and co-founder (collectively, the "Founders")
following the Initial Offering, the Company made a $1,000,000 cash payment to
the third-party limited partner in these two facilities in June, 1996. The
payment was made in exchange for the transfer to the Company by the third-party
of additional 1% partnership interests in each facility with a total book value
of $18,700 and the elimination of any requirement for the Founders to maintain
a specified ownership interest in the Company.
17. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
The following is a summary of quarterly results of operations for the fiscal
quarters since the consummation of the Initial Offering on June 5, 1996:
<TABLE>
<CAPTION>
Quarter Ended 1996
- -------------------------------------------------------------------------------
(in thousands, except per share data) June 30, Sept. 30, Dec. 31,
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Total operating revenues $11,262 $11,567 $14,778
Net loss (2,379) (490) (182)
Net loss per share $(0.33) $ (0.03) $ (.01)
</TABLE>
REPORT OF INDEPENDENT AUDITORS
Stockholders and Board of Directors
Sunrise Assisted Living, Inc.
We have audited the accompanying consolidated balance sheets of Sunrise
Assisted Living, Inc. (the "Company") as of December 31, 1996 and 1995, and the
related consolidated statements of operations, changes in stockholders' equity
(deficit), and cash flows for the years then ended. We also have audited the
combined statements of operations, owners' deficit, and cash flows of Sunrise
Entities (the predecessor to the Company, see Note 1) for the year ended
December 31, 1994. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Sunrise
Assisted Living, Inc. as of December 31, 1996 and 1995, and the consolidated
results of its operations and its cash flows for the years then ended, in
conformity with generally accepted accounting principles. Further, in our
opinion, the financial statements referred to above present fairly, in all
material respects, the combined results of operations and cash flows of Sunrise
Entities for the year ended December 31, 1994, in conformity with generally
accepted accounting principles.
/s/ ERNST & YOUNG LLP
Washington, D.C.
March 4, 1997
34
<PAGE> 37
OFFICERS
PAUL J. KLAASSEN, Co-founder of Sunrise Assisted Living, Inc. and Chairman of
the Board, President and Chief Executive Officer Mr. Klaassen was a founding
chairman of the Assisted Living Federation of America ("ALFA"), the largest
assisted living industry trade association. Mr. Klaassen also served on the
editorial advisor boards of Contemporary Long Term Care, Retirement Housing
Report, Assisted Living Today and Assisted Living Briefing magazines.
TERESA M. KLAASSEN, Co-founder of Sunrise Assisted Living, Inc. and Executive
Vice President and Secretary Ms. Klaassen was a founding member of ALFA and
currently serves on the boards of several long-term care organizations.
DAVID W. FAEDER, Executive Vice President and Chief Financial Officer From 1991
to 1993, Mr. Faeder was a vice president of CS First Boston Corporation,
serving in both the investment banking and fixed income departments. From 1984
to 1991, Mr. Faeder served as a vice president of Morgan Stanley, where he
worked in the Real Estate Capital Markets Group.
TIMOTHY S. SMICK, Executive Vice President and Chief Operating Officer From
1995 to 1996, Mr. Smick was a senior housing consultant to LaSalle Advisory
Ltd., a pension fund advisory company. From 1984 to 1994, Mr. Smick was the
chairman and chief executive officer of PersonaCare Inc., a company he
co-founded that provided subacute, skilled nursing and assisted living care.
From 1979 to 1981, Mr. Smick was the regional operations director for Manor
Healthcare, a division of ManorCare, Inc., a long-term care company.
THOMAS B. NEWELL, Executive Vice President, General Counsel and President of
Sunrise Development, Inc. From 1989 to January 1996, Mr. Newell was a partner
with the law firm of Watt Tieder & Hoffar, where his practice concentrated on
all aspects of commercial and real estate development transactions and where he
represented Sunrise Assisted Living for more than five years.
BRIAN C. SWINTON, Executive Vice President, Sales and Marketing From 1994 to
April 1996, Mr. Swinton was a senior vice president of Forum Group Inc., a
developer and operator of retirement communities and assisted living
facilities. From 1986 to 1994, Mr. Swinton served as vice president, sales,
marketing and product development at Marriot International in their senior
living division.
OTHER SENIOR MANAGEMENT OF COMPANY SUBSIDIARIES
WILLIAM F. CARNEY
Senior Vice President of
Operations/Northeast-Southeast Region
MARTHA L. CHILD
President, Martha Child Interiors, Inc.
DWAYNE J. CLARK
Executive Vice President of
Operations/Western Region
HARLEY D. COOK
Senior Vice President of Development
KATHLEEN M. DEZIO
Senior Vice President of Corporate
Communications and Public Affairs
DANIEL B. GORHAM
Senior Vice President of Acquisitions
LARRY E. HULSE
Senior Vice President and
Chief Accounting Officer
JAMES S. POPE
Senior Vice President of Finance
CATHERINE SCOTT-ASPLEN
Senior Vice President of
Operations/Maryland Homes
RICHARD W. SLOSSON
Senior Vice President of Construction
TIFFANY L. TOMASSO
Executive Vice President of
Operations/Mid-Atlantic Region
BOARD OF DIRECTORS
PAUL J. KLAASSEN
Co-founder and Chairman of the Board,
President and Chief Executive Officer
TERESA M. KLAASSEN
Co-founder and Executive Vice President
and Secretary
DAVID W. FAEDER
Executive Vice President and
Chief Financial Officer
TIMOTHY S. SMICK
Executive Vice President and
Chief Operating Officer
RONALD V. APRAHAMIAN
Mr. Aprahamian was chairman of the board and chief executive officer of the
Compucare Company, a health care information technology company, from 1988 to
1996. He also is a director of Metrocall, Inc., a paging company.
THOMAS J. DONOHUE
Mr. Donohue has been the president and chief executive officer of the American
Trucking Association, the national trade organization of the trucking industry,
since 1984. He is a director of: Marymount University; IPAC, an international
consulting firm; Newmyer Associates, a Washington, D.C. public policy firm; and
the Hudson Institute.
RICHARD A. DOPPELT
Mr. Doppelt is venture group manager of Allstate Venture Capital, a division of
Allstate Insurance Company. He is currently a director of Au Bon Pain-Midwest,
Levy restaurants, and Bell Microproducts, and an advisory board member of The
Environmental Venture Fund.
SCOTT F. MEADOW
Mr. Meadow is a vice president of The Sprout Group, the venture capital
division of DLJ Capital Corporation. He has been a general partner of Frontenac
Company; general partner of William Blair Venture Partners, and is a director
of Medpartners/Mullikin Inc., a physician practice management company.
DARCY J. MOORE
Ms. Moore is a general partner of Frontenac Company, a venture capital firm,
and an associate of William Blair Venture Partners. She is a director of
Healthcare Resource Management, Inc., a radiology services company; Nurse On
Call, Inc. a demand management company; and ElderHealth, Inc., an elder care
company.
35
<PAGE> 38
A GROWING NETWORK
[MAP]
COMMUNITIES
Open 37
Under Construction 22
Under Contract 23
SUNRISE ASSISTED LIVING RESIDENCES
CALIFORNIA
Sunrise at The Chanate
Santa Rosa, California
707.575.7503
Sunrise of Fresno(2)
Fresno, California
209.325.8170
Sunrise at Sterling Canyon(1)
Valencia, California
805.253.3551
Sunrise of Petaluma(2)
Petaluma, California
707.776.2885
Sunrise of Walnut Creek(3)
Walnut Creek, California
888.434.4648
COLORADO
Sunrise at Pinehurst(3)
Denver, Colorado
888.434.4648
FLORIDA
Sunrise Atrium of Boca Raton
Boca Raton, Florida
407.750.7555
Sunrise at North Shore
A Senior Living Community
St. Petersburg, Florida
813.823.1571
GEORGIA
Sunrise of Augusta
Augusta, Georgia
706.738.6003
Sunrise at Brookside Glen
Columbus, Georgia
706.322.3040
Sunrise of Decatur(2)
Decatur, Georgia
404.377.6111
Sunrise of East Cobb(2)
Marietta, Georgia
770.509.0919
Huntcliff Summit by Sunrise(1)
Atlanta, Georgia
770.552.3000
Sunrise at Ivey Ridge(3)
Alpharetta, Georgia
770.475.6622
MARYLAND
Sunrise of Annapolis
Annapolis, Maryland
410.266.1400
Sunrise of Columbia
Columbia, Maryland
410.531.1444
Sunrise of Frederick
Frederick, Maryland
301.663.9500
Sunrise of Rockville(2)
Rockville, Maryland
301.309.0500
Sunrise of Severna Park(1, 2)
Severna Park, Maryland
410.544.7200
Sunrise of Towson
Towson, Maryland
410.296.8900
Sunrise of Pikesville
Pikesville, Maryland
410.602.0033
The Sunrise Village House(1)
Montgomery Village, Maryland
301.921.0445
MASSACHUSETTS
Sunrise at Gardner Park
Peabody, Massachusetts
508.532.3200
John Bertram House(4)
Salem, Massachusetts
508.744.1002
John Bertram House
of Swampscott(2,4)
Swampscott, Massachusetts
617.595.1991
Sunrise of Norwood(2)
Norwood, Massachusetts
617.762.1333
Springhouse, Inc.(4)
A Non-profit Continuing Care
Retirement Community
Boston, Massachusetts
617.522.0043
Sunrise of Wayland(2)
Wayland, Massachusetts
508.358.0035
NEW JERSEY
Sunrise of Morris Plains(2)
Morris Plains, New Jersey
201.538.7878
Sunrise of Old Tappan(2)
Old Tappan, New Jersey
201.722.8787
Sunrise of Wayne(2)
Wayne, New Jersey
201.628.4900
Sunrise of Westfield(2)
Westfield, New Jersey
908.317.3030
Sunrise of Mount Laurel(2)
Mount Laurel, New Jersey
609.222.1213
Sunrise at Woodbury Lake(4)
Woodbury, New Jersey
609.848.8777
NEW YORK
Sunrise of Glen Cove(3)
Glen Cove, New York
888-434-4648
NORTH CAROLINA
Sunrise of Raleigh
Raleigh, North Carolina
919.787.0777
PENNSYLVANIA
Sunrise of Abington(1, 2)
Abington, Pennsylvania
215.576.8899
Sunrise of Blue Bell
Blue Bell, Pennsylvania
215.619.2777
Sunrise at Granite Run(2)
Media, Pennsylvania
610.566.3535
Sunrise of Haverford(3)
Haverford, Pennsylvania
610.896.9777
Mill Run(4)
Bristol, Pennsylvania
215.788.3310
SOUTH CAROLINA
Sunrise of Greenville
Greenville, South Carolina
864.627.8700
VIRGINIA
Sunrise of Alexandria(2)
Alexandria, Virginia
703.212.7666
Sunrise of Arlington
Arlington, Virginia
703.524.5300
Sunrise at Bluemont Park(1)
Arlington, Virginia
The James 703.536.1050
The Shenandoah 703.536.1060
The Potomac 703.536.1070
Sunrise at Countryside(1)
Sterling, Virginia
703.430.0681
Sunrise of Fairfax
Fairfax, Virginia
703.691.0046
Sunrise of Falls Church
Falls Church, Virginia
703.534.2700
Sunrise of Springfield(2)
Springfield, Virginia
703.922.6800
Sunrise of Gunston
Lorton, Virginia
703.550.2400
Sunrise at Hunter Mill
Oakton, Virginia
703.255.1006
Sunrise of Leesburg
Leesburg, Virginia
703.777.1971
Sunrise of Oakton
Oakton, Virginia
703.255.2050
Sunrise of Warrenton
Warrenton, Virginia
540.349.9001
The Lincolnian(1, 4)
Alexandria, Virginia
703.914.0333
WASHINGTON
Sunrise of Mercer Island
Mercer Island, Washington
206.232.6565
Sunrise of Queen Anne
An Independent Living
Residence
Seattle, Washington
206.282.5777
(1) An Independent & Assisted Living Residence
(2) Opening in 1997
(3) Opening in 1998
(4) Managed Facility
36
<PAGE> 39
CORPORATE INFORMATION
CORPORATE HEADQUARTERS
Sunrise Assisted Living, Inc.
9401 Lee Highway, Suite 300
Fairfax, VA 22031
703.273.7500
TRANSFER AGENT AND REGISTRAR
First Union National Bank of North Carolina
230 South Tryon Street
Charlotte, NC 28288
ANNUAL MEETING DATE
The Company will hold its annual meeting
of stockholders on Monday, April 28, 1997
at 9:00 a.m. at:
Ritz-carlton, Tysons Corner
1700 Tysons Boulevard
McLean, Virginia 22102
703.506.4300
FORM 10-K
Copies of Form 10-K filed with the Securities and
Exchange Commission are available with-out charge
upon written request addressed to Investor Relations
at the corporate headquarters.
STOCK INFORMATION
The Company's common stock is listed and traded
publicly on the Nasdaq National Market under the
symbol SNRZ. Trading of the common stock
commenced May 31, 1996. As of March 17, 1997, there
were 39 stockholders of record. No cash dividends
have been paid in the past, and none are expected
in the foreseeable future.
QUARTERLY MARKET PRICE RANGE OF COMMON
<TABLE>
<CAPTION>
Quarter Ended High Low
- -----------------------------------
<S> <C> <C>
June 30, 1996 $25.75 $23.00
September 30, 1996 30.00 21.50
December 31, 1996 28.75 23.00
</TABLE>
Design: Financial Communications, Inc. Bethesda, MD (C)Sunrise Assisted Living,
Inc., 1997
Photography: Craig Thompson, David Galen, Jerry Staley, Stan
Flint and Dennis Brock.
<PAGE> 40
[PHOTO]
[PHOTO]
[PHOTO]
The real leaders in the revolution in long-term care are the caregivers. These
seven Sunrise team members represent the more than 2,000 employees who work in
Sunrise communities across the country, providing residents with high-quality,
personalized and compassionate care.
[PHOTO]
[PHOTO]
Clockwise, from top left: Betty Barton, Concierge; Richard Woods, Jr., Dietary
Coordinator; Tammy Harless, Program Coordinator, with Sunrise resident Julia
Jordan; Kimberly Beazley, Shift Supervisor and Medicine Technician, with
Sunrise resident Ilene Keats; A. Douglas Markland, Jr., Maintenance
Coordinator; Kevin Hunter, Executive Director; Jan Fleming, LPN and Wellness
Nurse, with Sunrise resident Katherine Costley.
[PHOTO]
[PHOTO]
[SUNRISE LOGO]
9401 Lee Highway
Suite 300
Fairfax, Virginia 22031
703.273.7500
<PAGE> 1
EXHIBIT 21
Sunrise Assisted Living, Inc.
List of Subsidiaries
<TABLE>
<CAPTION>
Direct or Indirect Jurisdiction
Subsidiaries Ownership of Incorporation
- ------------ ------------------ ----------------
<S> <C> <C>
Sunrise Terrace, Inc. 100% Virginia
Sunrise Development, Inc. 100% Virginia
Sunrise Assisted Living
Investments, Inc. 100% Virginia
Sunrise Assisted Living
Limited Partnership 100% Virginia
Sunrise Assisted Limited Partnership 100% Virginia
Sunrise at Gardner Park
Limited Partnership 50% Massachusetts
Sunrise of Raleigh, LLC 50% North Carolina
Sunrise Village House, LLC 80% Maryland
Sunrise Assisted Living
Limited Partnership II 100% Virginia
Sunrise Assisted Living
Limited Partnership III 100% Pennsylvania
Sunrise Assisted Living
Limited Partnership IV 100% New Jersey
Sunrise Assisted Living
Limited Partnership V 100% New Jersey
Sunrise Assisted Living
Limited Partnership VI 100% New Jersey
Sunrise Assisted Living
Limited Partnership VII 100% Maryland
Sunrise Assisted Living
Limited Partnership VIII 100% California
Sunrise Assisted Living of Abington, L.P. 100% Pennsylvania
Sunrise Assisted Living of Granite Run, L.P. 100% Pennsylvania
Sunrise Assisted Living of Franconia, L.P. 100% Virginia
Independence Home Care
Agency, Inc. 100% Washington
Sunrise Homes of Towson LLC 100% Maryland
Sunrise East Assisted Living
Limited Partnership 100% Virginia
Sunrise of Alexandria
Assisted Living, L.P. 100% Virginia
Sunrise of Rockville Assisted
Living Limited Partnership 100% Maryland
Sunrise Huntcliff Assisted
Living Limited Partnership 100% Georgia
Sunrise Augusta Assisted
Living Limited Partnership 100% Georgia
Sunrise Columbus Assisted
Living Limited Partnership 100% Georgia
Sunrise Greenville Assisted
Living Limited Partnership 100% South Carolina
Sunrise Northshore Assisted
Living Limited Partnership 100% Florida
Sunrise of Westfield Assisted
Living, L.P. 100% Maryland
NAH/Sunrise Severna Park, LLC 50% Maryland
Sunrise Wayland Assisted
Living Limited Partnership 100% Massachusetts
Sunrise Norwood Assisted
Living Limited Partnership 100% Massachusetts
Sunrise Napa Assisted
Living Limited Partnership 100% California
Sunrise Walnut Creek Assisted
Living Limited Partnership 100% California
Sunrise West Assisted Living
Limited Partnership 100% California
Sunrise Sterling Canyon Assisted
Living Limited Partnership 100% California
Sunrise Decatur Assisted
Living Limited Partnership 100% Georgia
Sunrise Ivey Ridge Assisted
Living Limited Partnership 100% Georgia
Sunrise East Cobb Assisted
Living Limited Partnership 100% Georgia
Sunrise Glen Cove Assisted
Living Limited Partnership 100% New York
</TABLE>
<PAGE> 1
Exhibit 23
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Annual Report (Form 10-K)
of Sunrise Assisted Living, Inc. of our report dated March 4, 1997, included in
the 1996 Annual Report to Stockholders of Sunrise Assisted Living, Inc.
We also consent to the incorporation by reference in the Registration Statements
pertaining to the 1995 Stock Option Plan, as amended; 1996 Directors' Stock
Option Plan; and the Stock Option Agreement entered into, effective January 4,
1995, by and between Sunrise Assisted Living, Inc. and David W. Faeder, (Form
S-8 No. 333-05257) and the Sunrise Assisted Living, Inc. 1996 Non-Incentive
Stock Option Plan (Form S-8 No. 333-21817), respectively, of our report dated
March 4, 1997 with respect to the consolidated financial statements of Sunrise
Assisted Living, Inc. incorporated by reference in the Annual Report (Form
10-K) for the year ended December 31, 1996.
/s/ Ernst & Young LLP
Washington, D.C.
March 26, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 101,811
<SECURITIES> 8,322
<RECEIVABLES> 2,449
<ALLOWANCES> 927
<INVENTORY> 0
<CURRENT-ASSETS> 114,049
<PP&E> 235,320
<DEPRECIATION> 18,609
<TOTAL-ASSETS> 342,839
<CURRENT-LIABILITIES> 12,194
<BONDS> 142,351
0
0
<COMMON> 185
<OTHER-SE> 185,639
<TOTAL-LIABILITY-AND-EQUITY> 342,839
<SALES> 0
<TOTAL-REVENUES> 47,345
<CGS> 0
<TOTAL-COSTS> 44,914
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 727
<INTEREST-EXPENSE> 9,722
<INCOME-PRETAX> (4,760)
<INCOME-TAX> 0
<INCOME-CONTINUING> (4,760)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (4,760)
<EPS-PRIMARY> (0.51)
<EPS-DILUTED> (0.51)
</TABLE>
